IMPORTANT NOTICE
NOT FOR DISTRIBUTION TO ANY U.S. PERSON OR TO ANY PERSON OR ADDRESS IN THE UNITED STATES
IMPORTANT: You must read the following disclaimer before continuing. The following disclaimer applies to the Prospectus following this page, and you are therefore advised to read this disclaimer carefully before reading, accessing or making any other use of the Prospectus. In accessing the Prospectus, you agree to be bound by the following terms and conditions, including any modifications to them from time to time, each time you receive any information from us as a result of such access.
NOTHING IN THIS ELECTRONIC TRANSMISSION CONSTITUTES AN OFFER OF SECURITIES FOR SALE IN THE UNITED STATES OR ANY OTHER JURISDICTION WHERE IT IS UNLAWFUL TO DO SO. THE SECURITIES HAVE NOT BEEN, AND WILL NOT BE, REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR OTHER JURISDICTION AND THE SECURITIES MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS (AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT), EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE OR LOCAL SECURITIES LAWS.
THE FOLLOWING PROSPECTUS MAY NOT BE FORWARDED, DELIVERED OR DISTRIBUTED TO ANY OTHER PERSON, ELECTRONICALLY OR OTHERWISE, AND MAY NOT BE REPRODUCED IN ANY MANNER WHATSOEVER, AND IN PARTICULAR, MAY NOT BE FORWARDED TO ANY U.S. PERSON OR TO ANY U.S. ADDRESS. ANY FORWARDING, DISTRIBUTION OR REPRODUCTION OF THIS DOCUMENT IN WHOLE OR IN PART IS UNAUTHORISED. FAILURE TO COMPLY WITH THIS DIRECTIVE MAY RESULT IN A VIOLATION OF THE SECURITIES ACT OR THE APPLICABLE LAWS OF OTHER JURISDICTIONS.
Confirmation of your Representations: In order to be eligible to view this Prospectus or make an investment decision with respect to the securities offered hereunder, investors must not be a U.S. person (within the meaning of Regulation S under the Securities Act). This Prospectus is being sent at your request and by accepting the e-mail and accessing this Prospectus, you shall be deemed to have represented to us that you are not a U.S. person, the electronic mail address that you gave us and to which this e-mail has been delivered is not located in the U.S. and that you consent to delivery of such Prospectus and any amendment or supplements thereto by electronic transmission.
You are reminded that this Prospectus has been delivered to you, and you have accessed it, on the basis that you are a person into whose possession this Prospectus may be lawfully delivered in accordance with the laws of the jurisdiction in which you are located and you may not, nor are you authorised to, deliver this Prospectus, electronically or otherwise, to any other person. If you have gained access to this transmission contrary to the foregoing restrictions, you will be unable to purchase any of the securities described therein.
The materials relating to the offering of securities do not constitute, and may not be used in connection with an offer or solicitation in any place where offers or solicitations are not permitted by law. If a jurisdiction requires that the offering be made by a licensed broker or dealer and The Royal Bank of Scotland plc, Citigroup Global Markets Limited or HSBC Bank plc or any affiliate of The Royal Bank of Scotland plc, Citigroup Global Markets Limited or HSBC Bank plc is a licensed broker or dealer in that jurisdiction, the offering shall be deemed to be made by The Royal Bank of Scotland plc, Citigroup Global Markets Limited or HSBC Bank plc or such affiliate on behalf of the Issuer in such jurisdiction.
This Prospectus has been made available to you in an electronic form. You are reminded that documents transmitted via this medium may be altered or changed during the process of electronic transmission and consequently none of Citigroup Global Markets Limited, HSBC Bank plc, The Royal Bank of Scotland plc or any person who controls any of them nor any director, officer, employee, representative nor agent of any
I of them or affiliate of any such person accepts any liability or responsibility whatsoever in respect of any difference or discrepancies between this Prospectus distributed to you in electronic format and the hard copy version available to you on request from Citigroup Global Markets Limited, HSBC Bank plc or The Royal Bank of Scotland plc.
If you receive this document by email, you should not reply by email to this announcement, and you may not purchase any securities by doing so.
If you receive this document by email, your use of this email is at your own risk and it is your responsibility to take precautions to ensure that it is free from viruses and other items of a destructive nature.
II
SOUTHERN WATER SERVICES (FINANCE) LIMITED
(incorporated with limited liability in the Cayman Islands with registered number 112331)
Multicurrency programme for the issuance of Guaranteed Bonds
financing Southern Water Services Limited
(incorporated in England and Wales with limited liability with registered number 2366670)
On 23 July 2003, Southern Water Services (Finance) Limited (the “Issuer”), entered into a multicurrency programme for the issuance of up to £3,000,000,000 Guaranteed Wrapped Bonds and £3,000,000,000 Guaranteed Unwrapped Bonds (the “Programme”). The Programme was last updated on 13 October 2006. This Prospectus supersedes the offering circular relating to the Programme dated 13 October 2006. This Prospectus does not affect any bonds issued under the Programme before the date of this Prospectus. The payment of all amounts owing in respect of the bonds issued under the Programme (the “Bonds”) will be unconditionally and irrevocably guaranteed by Southern Water Services Limited (“SWS”), SWS Holdings Limited (“SWSH”) and SWS Group Holdings Limited (“SWSGH”) as described herein. SWS, the Issuer, SWSH and SWSGH are together referred to herein as the “Obligors”. Neither SWSH nor SWSGH has any significant assets other than the shares in its respective subsidiary.
Application has been made to the Financial Services Authority in its capacity as competent authority under the Financial Services and Markets Act 2000 as amended (“FSMA”) (the “UK Listing Authority” or “UKLA”) for Bonds issued under the Programme during the period of twelve months after the date hereof, to be admitted to the official list of the UK Listing Authority (the “Official List”) and to the London Stock Exchange plc (the “London Stock Exchange”) for such Bonds to be admitted to trading on either the London Stock Exchange’s Regulated Market (the “Market”) or on the London Stock Exchange’s Professional Securities Market (“PSM”). References in this Prospectus to Bonds being “listed” (and all related references) shall mean that such Bonds have been admitted to trading on the Market or the PSM and have been admitted to the Official List. The Market is a regulated market for the purposes of Directive 2004/39/EC of the European Parliament and of the Council on markets in financial instruments. The PSM is not a regulated market for the purposes of Directive 2004/39/EC of the European Parliament and of the Council on markets in financial instruments.
The Programme provides that Bonds may be listed on such other or further stock exchange(s) as may be agreed between the Obligors and the relevant Dealer (as defined below). The Issuer may also issue unlisted Bonds.
The Bonds may be issued on a continuing basis, to one or more of the Dealers specified under Chapter 1 “The Parties” and any additional Dealer appointed under the Programme from time to time by the Issuer (each a “Dealer” and together the “Dealers”), which appointment may be for a specific issue or on an ongoing basis. References in this Prospectus to the “relevant Dealer” shall, in the case of an issue of Bonds being (or intended to be) subscribed by more than one Dealer or in respect of which subscriptions will be procured by more than one Dealer, be to all Dealers agreeing to subscribe to such Bonds or to procure subscriptions for such Bonds, as the case may be.
For the avoidance of doubt, the Issuer may not as of the date of this Prospectus issue Wrapped Bonds pursuant to this Prospectus without issuing a supplemental prospectus.
Please see Chapter 5 “Risk Factors” to read about certain factors you should consider before buying any Bonds.
Co-Arrangers The Royal Bank of Scotland Citi Dealers Citi HSBC The Royal Bank of Scotland
Prospectus dated 27 February 2009
1 Table of Contents
Page
IMPORTANT NOTICE...... 5 DOCUMENTS INCORPORATED BY REFERENCE...... 7 SUPPLEMENTARY PROSPECTUS...... 8
SUPPLEMENTARY LISTING PARTICULARS...... 8 CHAPTER 1 THE PARTIES...... 9 CHAPTER 2 OVERVIEW OF THE PROGRAMME...... 13 CHAPTER 3 SUMMARY FINANCING STRUCTURE...... 22
CHAPTER 4 DESCRIPTION OF THE SWS FINANCING GROUP...... 30 CHAPTER 5 RISK FACTORS ...... 55
CHAPTER 6 REGULATION OF THE WATER AND WASTEWATER INDUSTRY IN ENGLAND AND WALES ...... 75 CHAPTER 7 SUMMARY OF THE FINANCING AGREEMENTS...... 110 CHAPTER 8 THE BONDS...... 173 PRO FORMA FINAL TERMS...... 212
CHAPTER 9 USE OF PROCEEDS ...... 223 CHAPTER 10 DESCRIPTION OF HEDGE COUNTERPARTIES ...... 224 CHAPTER 11 TAX CONSIDERATIONS ...... 228 CHAPTER 12 SUBSCRIPTION AND SALE ...... 231
CHAPTER 13 GENERAL INFORMATION ...... 234 INDEX OF DEFINED TERMS ...... 238
2 Under the Programme the Issuer may, subject to all applicable legal and regulatory requirements, from time to time issue Bonds in bearer and/or registered form (respectively “Bearer Bonds” and “Registered Bonds”). Copies of the Final Terms (as defined below) will be available (in the case of all Bonds) from the specified office set out below of Deutsche Trustee Company Limited as bond trustee (the “Bond Trustee”), (in the case of Bearer Bonds) from the specified office set out below of each of the Paying Agents (as defined below) and (in the case of Registered Bonds) from the specified office set out below of each of the Registrar and the Transfer Agent (each as defined below), provided that, in the case of Bonds which are not listed on any stock exchange, copies of the relevant Final Terms will only be available for inspection by the relevant Bondholders.
The maximum aggregate nominal amount of all Bonds from time to time outstanding under the Programme will not exceed £6,000,000,000 (or its equivalent in other currencies calculated as described herein), subject to increase as described herein.
Details of the aggregate principal amount, interest (if any) payable, the issue price and any other conditions not contained herein, which are applicable to each Tranche of each Sub-Class of each Class of each Series (all as defined below) will be set forth in a set of final terms (the “Final Terms”) which, in the case of Bonds to be admitted to the Official List and to trading on the Market or the PSM, will be delivered to the UK Listing Authority and the London Stock Exchange on or before the relevant date of issue of the Bonds of such Tranche. The Issuer may also issue unlisted Bonds.
Bonds issued under the Programme will be issued in series (each a “Series”) and in one or more of four classes (each a “Class”). The guaranteed wrapped Bonds will be designated as either “Class A Wrapped Bonds” or as “Class B Wrapped Bonds”. The guaranteed unwrapped Bonds will be designated as either “Class A Unwrapped Bonds” or “Class B Unwrapped Bonds”. Each Class may comprise one or more sub-classes (each a “Sub-Class”) with each Sub-Class pertaining to, among other things, the currency, interest rate and maturity date of the relevant Sub-Class. Each Sub-Class may be zero-coupon, fixed rate, floating rate or index-linked Bonds and may be denominated in sterling, euro or U.S. dollars (or in other currencies subject to compliance with applicable laws).
Each Class of Bonds is expected on issue to have the following credit ratings:
Standard & Class Poor’s Moody’s Fitch
Class A Unwrapped Bonds A- A3 A Class B Unwrapped Bonds BBB Baa3 BBB
For the avoidance of doubt, the Issuer may not as of the date of this Prospectus issue Wrapped Bonds pursuant to this Prospectus. The credit ratings of any Class of Wrapped Bonds which may be issued under the Programme in the future are not known as at the date of this Prospectus.
Each Sub-Class of Bearer Bonds may be represented initially by a Temporary Global Bond (as defined below), without interest coupons, which will be deposited with a common depositary for Euroclear and Clearstream, Luxembourg (as defined below) on or about the Issue Date (as defined below) of such Sub- Class. Each such Temporary Global Bond will be exchangeable for definitive securities in bearer form following the expiration of 40 days after the later of the commencement of the offering and the relevant Issue Date, upon certification as to non-U.S. beneficial ownership or to the effect that the holder is a U.S. person who purchased in a transaction that did not require registration under the Securities Act (as defined below) and as may be required by U.S. tax laws and regulations, as described in Chapter 8 “The Bonds” under “Forms of the Bonds”. Ratings ascribed to all of the Bonds reflect only the views of Standard & Poor’s, a division of The McGraw Hill Companies (“Standard & Poor’s”), Moody’s Investors Service Limited (“Moody’s”) and Fitch Ratings Ltd. (“Fitch” and, together with Moody’s and Standard & Poor’s, the “Rating Agencies”).
3 A credit rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by any one or all of the Rating Agencies. A suspension, reduction or withdrawal of the rating assigned to any of the Bonds may adversely affect the market price of such Bonds.
If any withholding or deduction for or on account of tax is applicable to the Bonds, payments of interest on, principal of and premium (if any) on, the Bonds will be made subject to such withholding or deduction, without the Issuer being obliged to pay any additional amounts as a consequence.
In the case of any Bonds which are to be admitted to trading on a regulated market within the European Economic Area or offered to the public in a Member State of the European Economic Area in circumstances which require the publication of a prospectus under the Prospectus Directive (2003/71/EC) (the “Prospectus Directive”), the minimum denomination shall be €50,000 (or its equivalent in any other currency as at the date of issue of the Bonds).
The Obligors may agree with any Dealer and the Bond Trustee that Bonds may be issued in a form not contemplated by the Conditions (as defined below) herein, in which event (in the case of Bonds admitted to the Official List only) a supplementary prospectus or further prospectus, if appropriate, will be made available which will describe the effect of the agreement reached in relation to such Bonds.
4 IMPORTANT NOTICE
This prospectus (the “Prospectus”) comprises (i) a base prospectus for the purposes of Article 5.4 of the Prospectus Directive and for the purpose of giving information with regard to the Issuer and the other Obligors which, according to the particular nature of the Issuer and the Bonds, is necessary to enable investors to make an informed assessment of the assets and liabilities, financial position, profit and losses and prospects of the Issuer and (ii) listing particulars for the purposes of LR2.2.11 of the Listing Rules of the Financial Services Authority.
Each of the Issuer and the other Obligors accepts responsibility for the information contained in this Prospectus. To the best of the knowledge and belief of the Issuer and each of the other Obligors (having taken all reasonable care to ensure that such is the case) the information contained in this Prospectus is in accordance with the facts and does not omit anything likely to affect the import of such information.
The information relating to The Royal Bank of Scotland plc and The Royal Bank of Scotland Group plc contained in Chapter 10 “Description of Hedge Counterparties” has been accurately reproduced and as far as the Issuer is aware and is able to ascertain from such information, no facts have been omitted which would render the reproduced information inaccurate or misleading. The information relating to Citibank, N.A., Citigroup Inc. and their affiliates contained in Chapter 10 “Description of Hedge Counterparties” has been accurately reproduced and as far as the Issuer is aware and is able to ascertain from such information, no facts have been omitted which would render the reproduced information inaccurate or misleading.
This Prospectus is being distributed only to, and is directed only at, persons who (i) are outside the United Kingdom or (ii) are persons who have professional experience in matters relating to investments falling within Article 19(1) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”) or (iii) are high net worth entities, and other persons to whom it may lawfully be communicated, falling within Article 49(1) of the Order (all such persons together being referred to as “relevant persons”) and in each case who do not constitute the public in the Cayman Islands. This Prospectus, or any of its contents, must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this Prospectus relates is available only to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such investments will be engaged in only with, relevant persons.
Copies of each set of Final Terms (in the case of Bonds to be admitted to the Official List) will be available from FT Business Research Centre, operated by FT Electronic Publishing at Fitzroy House, 13-15 Epworth Street, London EC2A 4DL and from the specified office set out below of each of the Paying Agents or the Registrar and Transfer Agents (as applicable).
This Prospectus is to be read in conjunction with all documents which are deemed to be incorporated herein by reference (see “Documents Incorporated by Reference” below).
The Series of Wrapped Bonds issued on 23 July 2003 and 27 May 2005 have the benefit of Financial Guarantees issued by MBIA Assurance S.A.. (A decision of the Comité des Entreprises d’Assurance (the French insurance regulator) on 27 December 2007 approved the transfer of the business of MBIA Assurance S.A. to MBIA UK Insurance Limited with effect from 28 December 2007 pursuant to article L.324-1 of the French Insurance Code; MBIA UK Insurance Limited has, therefore, assumed all rights and obligations of MBIA Assurance S.A. under the Transaction Documents as if it were the Initial Financial Guarantor of the Series of Wrapped Bonds issued on 23 July 2003 and 27 May 2005.) The £200,000,000 Sub-Class A9 4.50 per cent. Wrapped Bonds due March 2052 issued on 18 October 2006 have the benefit of a Financial Guarantee issued by MBIA UK Insurance Limited. The £300,000,000 Sub-Class A10 5.125 per cent. Wrapped Bonds due 2056 issued on 17 July 2007 have the benefit of a Financial Guarantee issued by Financial Security Assurance (U.K.) Limited (“FSA U.K.”). For any further Series of Wrapped Bonds issued under the Programme, a new Financial Guarantee dated as of the Issue Date of such Series of Wrapped Bonds will be entered into by a Financial Guarantor in respect of such Bonds.
5 In the case of each Tranche of Wrapped Bonds, admission to the Official List and trading on the Market or the PSM is subject to the issue by a Financial Guarantor of a Financial Guarantee in respect of such Tranche.
No person has been authorised to give any information or to make representations other than the information or the representations contained in this Prospectus in connection with the Issuer, any member of the SWS Financing Group (as defined below) or of the Group (as defined below) or the offering or sale of the Bonds and, if given or made, such information or representations must not be relied upon as having been authorised by the Issuer, any member of the SWS Financing Group or of the Group the Dealers, the Bond Trustee or the Security Trustee. Neither the delivery of this Prospectus nor any offering or sale of Bonds made in connection herewith shall, under any circumstances, constitute a representation or create any implication that there has been no change in the affairs of the Issuer or any member of the SWS Financing Group since the date hereof. Unless otherwise indicated herein, all information in this Prospectus is given as of the date of this Prospectus. This document does not constitute an offer of, or an invitation by, or on behalf of, the Issuer or any Dealer to subscribe for, or purchase, any of the Bonds.
None of the Dealers, the Financial Guarantors, the Bond Trustee or the Security Trustee nor any of the Hedge Counterparties, the Liquidity Facility Providers, the Authorised Credit Providers, the Agents, the Account Bank, the Standstill Cash Manager, the Mezzanine Facility Providers or the members of the Group (other than the Obligors) (each as defined below and, together, the “Other Parties”) has separately verified the information contained herein. Accordingly, no representation, warranty or undertaking, express or implied, is made and no responsibility or liability is accepted by any Dealer, Financial Guarantor, the Bond Trustee or the Security Trustee or Other Party as to the accuracy or completeness of the information contained in this Prospectus or any other information supplied in connection with the Bonds or their distribution. The statements made in this paragraph are without prejudice to the respective responsibilities of the Issuer and the other Obligors. Each person receiving this Prospectus acknowledges that such person has not relied on any Dealer, Financial Guarantor, the Bond Trustee or the Security Trustee or Other Party nor on any person affiliated with any of them in connection with its investigation of the accuracy of such information or its investment decision.
Neither the delivery of this Prospectus nor the offering, sale or delivery of any Bonds shall in any circumstances imply that the information contained herein concerning the Obligors is correct at any time subsequent to the date hereof or that any other information supplied in connection with the Programme is correct or that there has been no adverse change in the financial position of the Issuer or the other Obligors as of any time subsequent to the date indicated in the document containing the same. None of the Dealers, the Financial Guarantors, the Bond Trustee, the Security Trustee or the Other Parties expressly undertakes to review the financial condition or affairs of any of the Obligors during the life of the Programme or to advise any investor in the Bonds of any information coming to their attention. Investors should review, among other things, the most recently published documents incorporated by reference into this Prospectus when deciding whether or not to purchase any Bonds.
This Prospectus is not intended to provide the basis of any credit or other evaluation and should not be considered as a recommendation by the Issuer, any Financial Guarantor, any member of the SWS Financing Group, any member of the Group, any Dealer, the Bond Trustee, the Security Trustee or any of the Other Parties that any recipient of this Prospectus should purchase any of the Bonds.
Each person contemplating making an investment in the Bonds must make its own investigation and analysis of the creditworthiness of the Issuer and the other Obligors and its own determination of the suitability of any such investment, with particular reference to its own investment objectives and experience and any other factors which may be relevant to it in connection with such investment. A prospective investor who is in any doubt whatsoever as to the risks involved in investing in the Bonds should consult independent professional advisers.
The Bonds and any guarantees in respect thereof have not been and will not be registered, under the United States Securities Act of 1933, as amended (the “Securities Act”) or with any securities regulatory authority of any state or other jurisdiction of the United States and may include Bonds in bearer form that are subject to U.S. tax law requirements. Subject to certain exemptions, the Bonds may not be offered or sold or, in the
6 case of Bearer Bonds, delivered within the United States or to, or for the account or benefit of, U.S. persons (as defined in the Securities Act). The Bonds are being offered outside the United States in reliance on Regulation S under the Securities Act. See Chapter 12 “Subscription and Sale” below.
The distribution of this Prospectus and the offering, sale or delivery of the Bonds in certain jurisdictions may be restricted by law. Persons into whose possession this Prospectus comes are required by the Issuer and the Dealers to inform themselves about and to observe any such restrictions. For a description of certain restrictions on offers and sales of the Bonds and on distribution of this Prospectus, see Chapter 12 “Subscription and Sale” below. This Prospectus does not constitute, and may not be used for the purposes of, an offer to or solicitation by any person to subscribe or purchase any Bonds in any jurisdiction or in any circumstances in which such an offer or solicitation is not authorised or is unlawful.
No invitation may be made to the public in the Cayman Islands to subscribe for any of the Bonds.
All references herein to “pounds”, “sterling” or “£” are to the lawful currency of the United Kingdom, all references to “$”, “U.S.$”, “U.S. dollars” and “dollars” are to the lawful currency of the United States of America, and references to “€” or “euro” are to the single currency introduced at the start of the third stage of European Economic and Monetary Union pursuant to the Treaty establishing the European Community, as amended, from time to time.
In connection with the issue of any Tranche of Bonds, the Dealer or Dealers (if any) named as the stabilising manager(s) (the “Stabilising Manager(s)”) (or persons acting on behalf of any Stabilising Manager(s)) in the applicable Final Terms may over-allot such Bonds or effect transactions with a view to supporting the market price of the Bonds of the Series of which such Tranche forms part, at a level higher than that which might otherwise prevail. However, there is no assurance that the Stabilising Manager(s) or persons acting on behalf of a Stabilising Manager will undertake stabilisation action. Any stabilisation action may begin on or after the date on which adequate public disclosure of the terms of the offer of the relevant Tranche of Bonds is made and, if begun, may be ended at any time, but it must end no later than the earlier of 30 days after the Issue Date of the relevant Tranche of Bonds and 60 days after the date of the allotment of the relevant Tranche of Bonds. Any stabilisation action or over-allotment must be conducted by the relevant Stabilising Manager(s) (or person(s) acting on behalf of the Stabilising Manager(s)) in accordance with all applicable laws and rules.
DOCUMENTS INCORPORATED BY REFERENCE
This Prospectus should be read and construed in conjunction with the audited non-consolidated financial statements of each of the Obligors for the financial years ended 31 March 2007 and 2008 together in each case with the audit report thereon, which have been previously published or are published simultaneously with this Prospectus and which have been approved by the Financial Services Authority or filed with it (see Chapter 13 “General Information — Documents Available” for a description of the financial statements currently available for each of the Obligors) save that any statement contained herein or in a document which is deemed to be incorporated by reference herein shall be deemed to be modified or superseded for the purpose of this Prospectus to the extent that a statement contained in any such subsequent document which is deemed to be incorporated by reference herein modifies or supersedes such earlier statement (whether expressly, by implication or otherwise). Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus.
Each Obligor will provide, without charge, to each person to whom a copy of this Prospectus has been delivered, upon the request of such person, a copy of any or all of the documents deemed to be incorporated herein by reference unless such documents have been modified or superseded as specified above. Requests for such documents should be directed to any of the Obligors, at their respective offices set out at the end of this Prospectus.
Each of the Obligors has undertaken to the Dealers in the Dealership Agreement (as defined in Chapter 12 “Subscription and Sale”) to comply with Section 81 of the FSMA.
7 If the terms of the Programme are modified or amended in a manner which would make this Prospectus, as so modified or amended, inaccurate or misleading, a new prospectus will be prepared.
Copies of documents deemed to be incorporated by reference in this Prospectus may be viewed on the website of the Regulatory News Service operated by the London Stock Exchange at http://www.londonstockexchange.com/en-gb/pricesnews/marketnews/.
SUPPLEMENTARY PROSPECTUS
The Issuer has undertaken, in connection with the admission of the Bonds to the Official List and to trading on the Market, that, if there shall occur any significant new factor, material mistake or inaccuracy relating to information contained in this Prospectus which is capable of affecting the assessment of any Bonds whose inclusion would reasonably be required by investors and their professional advisers, and would reasonably be expected by them to be found in this Prospectus, for the purpose of making an informed assessment of the assets and liabilities, financial position, profits and losses and prospects of the relevant Issuer, and the rights attaching to the Bonds, the Issuer shall prepare a supplement to this Prospectus or publish a replacement prospectus for use in connection with any subsequent issue by the Issuer of Bonds and will supply to each Dealer and the Bond Trustee such number of copies of such supplement hereto or replacement prospectus as such Dealer and Bond Trustee may reasonably request. The Issuer will also supply to the UK Listing Authority such number of copies of such supplement hereto or replacement prospectus as may be required by the UK Listing Authority and will make copies available, free of charge, upon oral or written request, at the specified offices of the Paying Agents (as defined herein).
If at any time any Issuer shall be required to prepare a supplemental prospectus pursuant to Section 87(G) of the Financial Services and Markets Act 2000 (the “FSMA”), the Issuer shall prepare and make available an appropriate supplement to this Prospectus or a further prospectus which, in respect of any subsequent issue of Bonds to be listed on the Official List and admitted to trading on the Market, shall constitute a supplemental prospectus as required by the UK Listing Authority and Section 87(G) of the FSMA.
SUPPLEMENTARY LISTING PARTICULARS
The Issuer has undertaken, in connection with the admission of the Bonds to the Official List and to trading on the PSM, that, if there shall occur a significant change affecting any matter contained in this Prospectus whose inclusion would reasonably be required by investors and their professional advisers, and would reasonably be expected by them to be found in this Prospectus, for the purpose of making an informed assessment of the assets and liabilities, financial position, profits and losses and prospects of the relevant Issuer, and the rights attaching to the Bonds, the Issuer shall prepare a supplement to this Prospectus or publish a replacement prospectus for use in connection with any subsequent issue by the Issuer of Bonds and will supply to each Dealer and the Bond Trustee such number of copies of such supplement hereto or replacement prospectus as such Dealer and Bond Trustee may reasonably request. The Issuer will also supply to the UK Listing Authority such number of copies of such supplement hereto or replacement prospectus as may be required by the UK Listing Authority and will make copies available, free of charge, upon oral or written request, at the specified offices of the Paying Agents (as defined herein).
If at any time any Issuer shall be required to prepare supplementary listing particulars pursuant to Section 81 of the FSMA, the Issuer shall prepare and make available an appropriate supplement to this Prospectus or a further prospectus which, in respect of any subsequent issue of Bonds to be listed on the Official List and admitted to trading on the PSM, shall constitute supplementary listing particulars as required by the UK Listing Authority and Section 81 of the FSMA.
8 CHAPTER 1 THE PARTIES
The Issuer Southern Water Services (Finance) Limited, a company incorporated in the Cayman Islands on 17 August 2001 with limited liability with registered number 112331, is the funding vehicle for raising funds to support the long term debt financing requirements of SWS. The Issuer is a 100% subsidiary of SWS. SWS Southern Water Services Limited, a company incorporated in England and Wales with limited liability (registered number 2366670) on 1 April 1989, which holds an Instrument of Appointment dated August 1989 under sections 11 and 14 of the Water Act 1989 (as in effect on 1 September 1989) under which the Secretary of State for the Environment appointed SWS as a water and sewerage undertaker under the WIA for the areas described in the Instrument of Appointment. SWSH owns 100% of the issued ordinary share capital in SWS. SWSH SWS Holdings Limited, a company incorporated in England and Wales with limited liability (registered number 04324499). SWSH is a 100% subsidiary of SWSGH. SWSGH SWS Group Holdings Limited, a company incorporated in England and Wales with limited liability (registered number 04324498). SWSGH is a 100% subsidiary of Southern Water Services Group Limited. Guarantors Pursuant to the terms of the Security Agreement, SWSH and SWSGH each guarantee the obligations of each other and of SWS and the Issuer under each Finance Document in favour of the Security Trustee. In addition, SWS and the Issuer each guarantee the obligations of each other (but not those of SWSH and SWSGH) under each Finance Document in favour of the Security Trustee. SWSH, SWSGH, SWS and the Issuer are collectively referred to herein as the “Guarantors” and each a “Guarantor”. SWS Financing Group The SWS Financing Group comprises SWSGH, SWSH, SWS, the Issuer and the Pension Companies (as defined below). SWSG Southern Water Services Group Limited, a company incorporated in England and Wales with limited liability (registered number 04374956), whose registered office is at Southern House, Yeoman Road, Worthing, West Sussex BN13 3NX. Southern Water Services Group Limited is a 100% subsidiary of SWI. SWI Southern Water Investments Limited, a company incorporated in England and Wales (registered number 04650294), whose registered office is at Southern House, Yeoman Road, Worthing, West Sussex BN13 3NX. SWI owns the Class A2 Preference Shares. SWI is a 100 per cent. subsidiary of SWC. SWC Southern Water Capital Limited, a company incorporated in England and Wales (registered number 04608528) whose registered office is Southern House, Yeoman Road, Worthing, West Sussex BN13 3NX. SWC owns the Class A1 Preference Shares and the Class B Preference Shares. Group SWI and its Subsidiaries from time to time.
9 Co-Arrangers The Royal Bank of Scotland plc and Citigroup Global Markets Limited are the Co-Arrangers of the Programme. Dealers Citigroup Global Markets Limited, HSBC Bank plc and The Royal Bank of Scotland plc, will act as dealers (together with any other dealer appointed from time to time by the Issuer and the other Guarantors, “Dealers”) either generally with respect to the Programme or in relation to a particular Tranche, Sub-Class, Class or Series of Bonds. Financial Guarantors Each of, (i) MBIA UK Insurance Limited (“MBIA UK”) as initial financial guarantor under the terms of a financial guarantee which it has issued in respect of Sub-Class A9 Wrapped Bonds issued on 18 October 2006 (the “MBIA UK Initial Financial Guarantee”), and in respect of Class A Wrapped Bonds issued on 23 July 2003 (the “Initial Issue Date”) and on 27 May 2005 and (ii) Financial Security Assurance (U.K.) Limited (“FSA UK”) (as initial financial guarantor, and together with MBIA UK, the “Initial Financial Guarantors” and each, an “Initial Financial Guarantor”) under the terms of a financial guarantee (together with the MBIA UK Initial Financial Guarantee, the “Initial Financial Guarantees”) which it has issued in respect of Sub- Class A10 Wrapped Bonds issued on 17 July 2007, and (iii) such other financial guarantee companies (each, together with the Initial Financial Guarantors, a “Financial Guarantor”) in addition to the Initial Financial Guarantors as the Issuer may arrange to issue Financial Guarantees in respect of further Tranches or Sub-Classes of Class A Wrapped Bonds and/or Class B Wrapped Bonds or in respect of other Wrapped Debt issued or raised under an Authorised Credit Facility. Hedge Counterparties The Royal Bank of Scotland plc acting through its office at 135 Bishopsgate London EC2M 3UR and Citibank, N.A., London Branch acting through its office at Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB (together the “Existing Hedge Counterparties” and, together with any counterparties to future Hedging Agreements, the “Hedge Counterparties”). The Existing Hedge Counterparties are under no obligation to enter into any further Treasury Transactions. Bond Trustee Deutsche Trustee Company Limited (or any successor trustee appointed pursuant to the Bond Trust Deed) acts as trustee (the “Bond Trustee”) for and on behalf of the holders of each Class of Bonds of each Series (each a “Bondholder”). Mezzanine Facility Provider SWC (as the current “Mezzanine Facility Provider”) has provided the Issuer with a £127,200,000 senior mezzanine credit facility and a £106,000,000 junior mezzanine credit facility (respectively the “Senior Mezzanine Facility” and the “Junior Mezzanine Facility” and together the “Mezzanine Facilities”), which it acquired from Royal Bank Investments Limited acting through its office at 280 Bishopsgate, London EC2M 4RB and a syndicate of lenders (the “Initial Mezzanine Facility Providers”). Security Trustee Deutsche Trustee Company Limited (or any successor trustee appointed pursuant to the STID) acts as security trustee for itself and on behalf of the Secured Creditors (as defined below) (the
10 “Security Trustee”) and holds, and will be entitled to enforce, the Security (as defined below) subject to the terms of the STID (as defined below). Secured Creditors The Secured Creditors comprise any person who is a party to, or has acceded to, the STID as a Secured Creditor. DSR Liquidity Facility Providers The Royal Bank of Scotland plc acting through its office at 135 Bishopsgate, London EC2M 3UR and Barclays Bank plc (the “Existing DSR Liquidity Facility Providers”) provide the Issuer with a 364-day revolving credit facility (as may be renewed from time to time) for interest requirements on the Class A Debt and, within certain limits, for interest requirements on the Class B Debt. The scheduled termination date of the DSR Liquidity Facility is currently 15 July 2009. O&M Reserve Facility Provider A provider of a liquidity facility pursuant to an O&M Reserve Facility Agreement to fund SWS’ operating and maintenance expenditure, which, among others, the Issuer and such O&M Reserve Facility Provider may enter into from time to time. Authorised Credit Providers RBS and a syndicate of banks (the “Initial RCF Providers”) provide SWS with revolving credit facilities to fund the working capital and capital expenditure requirements of SWS until 25 July 2010. Artesian Finance II plc and Artesian Finance plc have made index-linked advances to the Issuer. RBS and Bayerische Landesbank, London Branch (the “Second RCF Providers”) provide SWS with a revolving credit facility for SWS’ general corporate purposes until October 2010. Paying Agents Deutsche Bank AG, London Branch acts and will act as principal paying agent (the “Principal Paying Agent”) and, together with any other paying agents appointed by the Issuer, the “Paying Agents”) to provide certain issue and paying agency services to the Issuer in respect of the Bearer Bonds. Agent Bank Deutsche Bank AG, London Branch acts as agent bank (the “Agent Bank”) under the Agency Agreement. Account Bank National Westminster Bank Plc, acting through its office at 27 South Street, Worthing, West Sussex BN11 3AR or any person for the time being acting as Account Bank (pursuant to the Account Bank Agreement). National Westminster Bank Plc is a company incorporated in England and Wales with registered number 929027 and has its registered office at 135 Bishopsgate, London EC2M 3UR. National Westminster Bank Plc is part of the RBS Group. Cash Manager SWS acts, or during a Standstill Period The Royal Bank of Scotland plc (the “Standstill Cash Manager”) will act, pursuant to the terms of the cash management provisions of the CTA as cash manager in respect of moneys credited from time to time to the Accounts (as defined below).
11 Registrar and Transfer Agent Deutsche Bank AG, London Branch will act as transfer agent (the “Transfer Agent”) and will provide certain transfer agency services to the Issuer in respect of the Registered Bonds. Deutsche Bank Luxembourg S.A. will act as registrar (the “Registrar”) and will provide certain registrar services to the Issuer in respect of the Registered Bonds.
12 CHAPTER 2 OVERVIEW OF THE PROGRAMME
The following overview does not purport to be complete and is taken from, and is qualified in its entirety by, the remainder of this Prospectus and, in relation to the Conditions of any particular Tranche of Bonds, the applicable Final Terms. Words and expressions not defined in this overview shall have the same meanings as defined in Chapter 8 “The Bonds”.
Description Guaranteed Bond Programme. Programme Size Up to £6,000,000,000 (or its equivalent in other currencies) aggregate nominal amount of Bonds outstanding at any time. Issuance in Classes Bonds issued under the Programme have been and will be issued in Series, with each Series belonging to one of four Classes. The Wrapped Bonds are and will be designated as either Class A Wrapped Bonds or Class B Wrapped Bonds. The Unwrapped Bonds are and will be designated as one of Class A Unwrapped Bonds or Class B Unwrapped Bonds. Each Class comprises or will comprise one or more Sub-Classes of Bonds and each Sub-Class can be issued in one or more Tranches, the specific terms of each Tranche of a Sub-Class being identical in all respects, save for the issue dates, interest commencement dates and/or issue prices, to the terms of the other Tranches of such Sub-Class. The specific terms of each Tranche of Bonds are and will be set out in the applicable Final Terms. Issue Dates 23 July 2003 (the “Initial Issue Date”), 27 May 2005, 18 October 2006, 17 July 2007 and thereafter the date of issue of a Tranche of Bonds as specified in the relevant Final Terms (each an “Issue Date”). Certain Restrictions Each issue of Bonds denominated in a currency in respect of which particular laws, guidelines, regulations, restrictions or reporting requirements apply will only be issued in circumstances which comply with such laws, guidelines, regulations, restrictions or reporting requirements from time to time including the restrictions applicable at the date of this Prospectus. See Chapter 12 “Subscription and Sale”. Bonds with a maturity of less than one year Bonds having a maturity of less than one year from the date of issue will constitute deposits for the purposes of the prohibition on accepting deposits contained in section 19 of the FSMA unless they are issued to a limited class of professional investors and have a denomination of at least £100,000 or its equivalent. See Chapter 12 “Subscription and Sale”. Distribution Bonds have been and may be distributed by way of private or public placement and in each case on a syndicated or non- syndicated basis. Currencies Euro, Sterling, U.S. dollars and, subject to any applicable legal or regulatory restrictions, any other currency agreed between the Issuer and the relevant Dealer.
13 Redenomination The applicable Final Terms may provide that certain Bonds may be redenominated in euro. The relevant provisions applicable to any such redenomination will be contained in Condition 19 (European Economic and Monetary Union), as amended by the applicable Final Terms. Maturities Such maturities as may be agreed between the Issuer and the relevant Dealer, subject to such minimum or maximum maturities as may be allowed or required from time to time by the relevant central bank (or equivalent body) or any laws or regulations applicable to the Issuer or the relevant Specified Currency (as defined in the Conditions). Issue Price Bonds have been and may be issued on a fully-paid or a partly- paid basis and at an issue price which is at par or at a discount to, or premium over, par. Interest Bonds are and will, unless otherwise specified in the relevant Final Terms, be interest-bearing and interest is or will be calculated (unless otherwise specified in the relevant Final Terms) on the Principal Amount Outstanding (as defined in the Conditions) of such Bond. Interest accrues or will accrue at a fixed or floating rate (plus, in the case of Indexed Bonds, amounts in respect of indexation) and is or will be payable in arrear, as specified in the relevant Final Terms, or on such other basis and at such rate as may be so specified. Interest is or will be calculated on the basis of such Day Count Fraction (as defined in the Conditions) as may be agreed between the Issuer and the relevant Dealer as specified in the relevant Final Terms. Form of Bonds The Series 1 Bonds, Series 2 Bonds, Series 3 Bonds and Series 4 Bonds have been issued under the Programme in bearer form. Each further Sub-Class of Bonds will be issued in bearer or registered form as described in Chapter 8 “The Bonds”. Registered Bonds will not be exchangeable for Bearer Bonds. Fixed Rate Bonds Fixed Rate Bonds bear interest at a fixed rate of interest payable on such date or dates as may be agreed between the Issuer and the relevant Dealer and on redemption, as specified in the relevant Final Terms. Floating Rate Bonds Floating Rate Bonds bear interest at a rate determined: (i) on the same basis as the floating rate under a notional interest rate swap transaction in the relevant Specified Currency governed by an agreement incorporating (A) in the case of Bonds issued before the date of this Prospectus, the 2000 ISDA Definitions (as published by the International Swaps and Derivatives Association, Inc., and as amended and updated as at the Issue Date of the first Tranche of the Bonds of the relevant Sub-Class) and (B) in the case of Bonds issued on or after the date of this Prospectus, the 2006 ISDA Definitions (as published by the International Swaps and Derivatives Association, Inc.); or (ii) on the basis of a reference rate appearing on the agreed screen page of a commercial quotation service; or (iii) on such other basis as may be agreed between the Issuer
14 and the relevant Dealer. The margin (if any) relating to such floating rate has been or will be agreed between the Issuer and the relevant Dealer for each Sub-Class of Floating Rate Bonds. Indexed Bonds Payments (whether in respect of principal or interest and whether at maturity or otherwise) in respect of Indexed Bonds (including Limited Indexed Bonds as defined in Condition 7(a) (Indexation – Definitions)) are and may be calculated in accordance with Condition 7 by reference to the UK Retail Price Index or such other index and/or formula as the Issuer and the Relevant Dealer may agree (as specified in the relevant Final Terms). Interest Payment Dates Interest in respect of Fixed Rate Bonds is or will be payable annually in arrear, in respect of Floating Rate Bonds is or will be payable quarterly in arrear and in respect of Indexed Bonds is or will be payable semi-annually in arrear (or, in each case, as otherwise specified in the relevant Final Terms). Dual Currency Bonds Payments (whether in respect of principal or interest and whether at maturity or otherwise) in respect of Dual Currency Bonds will be made in such currencies, and based on such rates of exchange, as the Issuer and the relevant Dealer may agree. Zero Coupon Bonds Zero Coupon Bonds will be offered and sold at a discount to their nominal amount and will not bear interest. Partly Paid Bonds Partly Paid Bonds will be issued in the amount as specified in the relevant Final Terms and further instalments will be payable in the amounts and on the dates as specified in the relevant Final Terms. Instalment Bonds The applicable Final Terms may provide that Bonds may be redeemable in two or more instalments of such amounts and on such dates as are indicated in the applicable Final Terms. Redemption The applicable Final Terms indicate or will indicate either that the relevant Bonds cannot be redeemed prior to their stated maturity (other than in specified instalments, or for taxation reasons if applicable, or following an Index Event or an Event of Default) or that such Bonds will be redeemable at the option of the Issuer and/or the Bondholders upon giving notice to the Bondholders or the Issuer, as the case may be, on a date or dates specified prior to such stated maturity and at a price or prices and on such other terms as may be agreed between the Issuer and the relevant Dealer, in each case as set out in the applicable Final Terms. Redemption for Index Event, Taxation or Upon the occurrence of certain index events (as set out in Other Reasons Condition 8(c) (Redemption for Index Event, Taxation or Other Reasons)), the Issuer may redeem the Indexed Bonds at their Principal Amount Outstanding together with accrued but unpaid interest and amounts in respect of indexation. No single Sub- Class of Indexed Bonds may be redeemed in these circumstances unless all the other Sub-Classes of Indexed Bonds are also redeemed.
15 In addition, in the event of the Issuer becoming obliged to make any deduction or withholding from payments in respect of the Bonds (although the Issuer will not be obliged to pay any additional amounts in respect of such deduction or withholding) the Issuer may (a) use its reasonable endeavours to arrange for the substitution of another company incorporated in an alternative jurisdiction (subject to certain conditions as set out in Condition 8(c) (Redemption for Index Event, Taxation or Other Reasons) of the Bonds) and, failing this, (b) redeem (subject to certain conditions as set out in Condition 8(c) (Redemption for Index Event, Taxation or Other Reasons) of the Bonds) all (but not some only) of the Bonds at their Principal Amount Outstanding (plus, in the case of Indexed Bonds, amounts in respect of indexation) together with accrued but unpaid interest. No single Class or Sub-Class of Bonds may be redeemed in these circumstances unless all the other Classes and Sub-Classes of Bonds are also redeemed in full at the same time. In the event of SWS electing to prepay an advance (in whole or in part) under an Issuer/SWS Loan Agreement, the Issuer shall be obliged to redeem all or the relevant part of the corresponding Sub-Class of Bonds or the proportion of the relevant Sub-Class which the proposed prepayment amount bears to the amount of the relevant advance under the relevant Issuer/SWS Loan Agreement Bonds having a maturity of less than one year from the date of issue are subject to restrictions on their denomination and distribution. See “Certain Restrictions – Bonds with a maturity of less than one year” above. The Financial Guarantors have not and will not guarantee any of the amounts payable by the Issuer upon an early redemption, and their obligation is or will be to continue to make payments in respect of the Bonds pursuant to the relevant Financial Guarantee on the dates on which such payments would have been required to be made had such early redemption not occurred. The Issuer shall only be permitted to pay Early Redemption Amounts to the extent that in so doing it will not cause an Event of Default to occur or subsist. Denomination of Bonds Bonds have been and will be issued in such denominations as were or may be agreed between the Issuer and the relevant Dealer save that (i) in the case of any Bonds which are to be admitted to trading on a regulated market within the European Economic Area or offered to the public in a Member State of the European Economic Area in circumstances which require the publication of a prospectus under the Prospectus Directive, the minimum denomination shall be €50,000 (or its equivalent in any other currency as at the date of issue of the Bonds); and (ii) in any other case, the minimum denomination of each Bond will be such as may be allowed or required from time to time by the relevant central bank (or equivalent body) or any laws or regulations applicable to the relevant Specified Currency. See “Certain Restrictions – Bonds with a maturity of less than one
16 year” above. Taxation Payments in respect of Bonds or under the relevant Financial Guarantee are and will be made without withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature imposed or levied by or on behalf of any jurisdiction, unless and save to the extent that the withholding or deduction of such taxes, duties, assessments or governmental charges is required by law. In that event and to that extent, the Issuer and, to the extent there is a claim under the relevant Financial Guarantee, the relevant Financial Guarantor will make payments subject to the appropriate withholding or deduction. No additional amounts will be paid by the Issuer or the Guarantors or, to the extent there is a claim under the relevant Financial Guarantee, by the relevant Financial Guarantor in respect of any withholdings or deductions, unless otherwise specified in the applicable Final Terms. Status of the Bonds The Bonds in issue constitute and any future Bonds issued under the Programme will constitute secured obligations of the Issuer. Each Class of Bonds ranks pari passu without preference or priority in point of security amongst themselves. The Bonds represent the right of the holders of such Bonds to receive interest and principal payments from (a) the Issuer in accordance with the terms and conditions of the Bonds (the “Conditions”) and the trust deed dated 23 July 2003 as amended from time to time (the “Bond Trust Deed”) entered into by the Obligors, MBIA Assurance S.A. and the Bond Trustee in connection with the Programme and (b) in the case of the Wrapped Bonds only, the relevant Financial Guarantor in certain circumstances in accordance with the relevant Financial Guarantee. The Class A Wrapped Bonds and the Class A Unwrapped Bonds in issue rank, and any further Class A Wrapped Bonds and Class A Unwrapped Bonds issued under the Programme will rank, pari passu with respect to payments of interest and principal. However, only the Class A Wrapped Bonds have and will have the benefit of the relevant Financial Guarantee. All claims in respect of the Class A Wrapped Bonds and the Class A Unwrapped Bonds will rank in priority to payments of interest and principal due on all Class B Wrapped Bonds and Class B Unwrapped Bonds. The Class B Unwrapped Bonds in issue rank, and any Class B Wrapped Bonds and any further Class B Unwrapped Bonds issued under the Programme will rank, pari passu with respect to payments of interest and principal. However, only the Class B Wrapped Bonds will have the benefit of the relevant Financial Guarantee. Covenants The representations, warranties, covenants (positive, negative and financial) and events of default which apply and will apply to, among other things, the Bonds are set out in a common terms agreement dated 23 July 2003 (the “CTA”, see Chapter 7 “Summary of the Financing Agreements” under “Common
17 Terms Agreement”). Guarantee and Security The Bonds in issue are, and further Bonds issued under the Programme will be, unconditionally and irrevocably guaranteed and secured by each of SWS, SWSGH and SWSH pursuant to a guarantee and security agreement (the “Security Agreement”) entered into by each such Obligor in favour of the Security Trustee over the entire property, assets, rights and undertaking of each such Obligor (the “Security”), in the case of SWS to the extent permitted by the WIA and Licence. Each such guarantee constitutes a direct, unconditional and secured obligation of each such Obligor. The Security is held by the Security Trustee on trust for the Secured Creditors (as defined below) under the terms of the Security Agreement, subject to the terms of the STID (as defined below). SWS’ business (together with the facilities available to the SWS Financing Group) have characteristics that demonstrate the capacity to produce funds to service any payments due and payable on the Bonds issued. Inter-creditor Arrangements The Secured Creditors and each Obligor are each party to a security trust and intercreditor deed (the “STID”), which regulates, among other things, (i) the claims of the Secured Creditors; (ii) the exercise and enforcement of rights by the Secured Creditors; (iii) the rights of the Secured Creditors to instruct the Security Trustee; (iv) the rights of the Secured Creditors during the occurrence of an Event of Default; (v) the Entrenched Rights and Reserved Matters of each Secured Creditor; and (vi) the giving of consents and waivers and the making of amendments by the Secured Creditors. See Chapter 7 “Summary of the Financing Agreements” under “Security Trust and Intercreditor Deed”. Status of Financial Guarantees in relation Each Financial Guarantee issued in favour of the Bond Trustee to Wrapped Bonds in relation to each Sub-Class of Wrapped Bonds is or will be a direct, unsecured obligation of the relevant Financial Guarantor which ranks or will rank at least pari passu with all other unsecured obligations of such Financial Guarantor, save for such obligations as may be preferred by provisions of law that are both mandatory and of general application, pursuant to which the relevant Financial Guarantor guarantees or will guarantee the timely payment of interest and principal (other than the FG Excepted Amounts) on the relevant Sub-Class of Wrapped Bonds.
18 Reimbursement The Issuer is or will be obliged, pursuant to the terms of a guarantee and reimbursement deed or an insurance and indemnity agreement with the relevant Financial Guarantor in respect of any Sub-Class or Sub-Classes of Wrapped Bonds or any other Wrapped Debt, among other things, to reimburse such Financial Guarantor in respect of payments made by it under the relevant Financial Guarantee or Financial Guarantees of such Sub-Class or Sub-Classes of Bonds. Each such Financial Guarantor will be subrogated to the rights of the relevant Class A Wrapped Bondholders or Class B Wrapped Bondholders or Authorised Credit Provider, as the case may be, against the Issuer in respect of any payments made under such Financial Guarantees. See Chapter 7 “Summary of the Financing Agreements” under “Financial Guarantor Documents”. SWS guarantees such reimbursement obligations of the Issuer. Authorised Credit Facilities Subject to certain conditions being met, the Issuer and (for certain indebtedness) SWS are permitted to incur indebtedness under authorised credit facilities (each an “Authorised Credit Facility”) with an Authorised Credit Provider, providing loan, hedging and other facilities (including Financial Guarantees) which may rank pari passu with the Class A Bonds, the Class B Bonds, the Senior Mezzanine Debt or the Junior Mezzanine Debt. Each Authorised Credit Provider is or will become party to the CTA and the STID and may have voting rights thereunder. See Chapter 7 “Summary of the Financing Agreements”. DSR Liquidity Facility The DSR Liquidity Facility Providers make available to the Issuer a credit facility for the purpose of meeting certain shortfalls in revenues for the Issuer to meet, among other things, its obligations to pay interest on the Bonds. The Issuer is obliged, pursuant to the CTA, to maintain through a DSR Liquidity Facility (or DSR Liquidity Facilities) and/or amounts in the Debt Service Reserve Account an amount or amounts which is/are at least equal to the aggregate of projected interest payments on the Class A Debt and the Class B Debt for the succeeding 12 months. O&M Reserve and O&M Reserve Facility SWS has established a reserve in the amount of approximately £43.7 million (as at 31 December 2008) in the O&M Reserve Account of SWS. The principal amount credited to the O&M Reserve Account (the “O&M Reserve”) may only be used by SWS for the purpose of meeting its operating and maintenance expenses. O&M Reserve Facility Providers may additionally make available to the Issuer a liquidity facility, the proceeds from which will be on-lent by the Issuer to SWS for the purpose of meeting SWS’ operating and maintenance expenses.
19 Listing The Bonds issued on the Initial Issue Date and all subsequent issues under the Programme have been admitted to the Official List and admitted to trading on the Market. Application has been made to admit further Bonds issued under the Programme to the Official List and to admit them to trading on the Market or the PSM. The Bonds may also be listed on such other or further stock exchange(s) as may be agreed between the Issuer and the relevant Dealer in relation to each Series. Unlisted Bonds may also be issued. The applicable Final Terms will state whether or not the relevant Bonds are to be listed and, if so, on which stock exchange(s). Ratings The ratings assigned to Class A Wrapped Bonds that have been issued prior to the date of this Prospectus are based on the debt rating of the relevant Initial Financial Guarantor, and in respect of any further Class A Wrapped Bonds and Class B Wrapped Bonds to be issued under the Programme such ratings will be based on the debt rating of any Financial Guarantor appointed in relation to any further Wrapped Bonds issued under the Programme and reflect only the views of the Rating Agencies. The ratings assigned to the Class A Unwrapped Bonds and the Class B Unwrapped Bonds by the Rating Agencies reflect only the views of the Rating Agencies. The initial ratings of a Series of Bonds will be specified in the relevant Final Terms. A rating is not a recommendation to buy, sell or hold securities and will depend, among other things, on certain underlying characteristics of the business and financial condition of SWS or, in the case of the Class A Wrapped Bonds and/or Class B Wrapped Bonds, of the relevant Financial Guarantor. A rating may be subject to suspension, change or withdrawal at any time by the assigning Rating Agency. Governing Law The Bonds in issue are and any further Bonds issued under the Programme will be governed by, and construed in accordance with, English law. Selling Restrictions There are restrictions on the offer, sale and transfer of the Bonds in the United States, the United Kingdom and the Cayman Islands and such other restrictions as may be required in connection with the offering and sale of a particular Sub-Class of Bonds. See Chapter 12 “Subscription and Sale”. Investor Information SWS is required to produce an investors’ report (the “Investors’ Report”) semi-annually to be delivered within 120 days from 31 March or 60 days from 30 September of each year. Such Investors’ Report will include, among other things: (i) a general overview of the SWS business in respect of the six month period ending on the immediately preceding Calculation Date; (ii) the calculations of the Class A ICR, Class A Adjusted ICR and the Senior Adjusted ICR for each Test Period (historic and projected); (iii) the ratio of Net Cash Flow minus Capital Maintenance Expenditure to Class A Debt Interest for the twelve month period ending on such Calculation Date; (iv) the Class A RAR and Senior RAR (historic and projected); and (v) reasonable detail of the computations of these financial ratios. Each such Investors’ Report will be made available by SWS and
20 the Issuer to the Secured Creditors, including the Bondholders on SWS’ website. SWS is also required to make available unaudited interim financial statements and audited financial statements, within 60 days of 30 September and 120 days of 31 March, respectively and, in any event within five Business Days of the date on which they are made available. SWS will also place certain additional information on its website, as and when available. This will include, among other things, the most recently published: (a) annual charges scheme for SWS, with details of tariffs; (b) a summary of SWS’ strategic business plan at each Periodic Review; (c) SWS’ current Procurement Plan (as defined below) (if any); (d) SWS’ annual drinking water quality report; (e) SWS’ annual environment report; (f) SWS’ annual conservation and access report; and (g) such other periodic information compiled by SWS for Ofwat.
21 CHAPTER 3 SUMMARY FINANCING STRUCTURE
History and Background
Southern Water Capital Limited (“SWC”) holds 100 per cent. of the issued ordinary share capital of SWI. SWC also (i) owns the Class A1 Preference Shares and Class B Preference Shares and (ii) is lender under the Senior Mezzanine Facilities and Junior Mezzanine Facilities.
On 15 October 2007, SWC was acquired by Greensands Investments Limited.
Greensands Investments Limited is indirectly owned by a consortium of investors comprising:
• IIF Int’l SW UK Investment Limited (an independent infrastructure investments company advised by J.P. Morgan Investment Management Inc., having a 28.1 per cent. equity stake in the Greensands Companies;
• Challenger Southern Water Limited (a company owned by Challenger Infrastructure Fund, and having a 15.6 per cent. equity stake in the Greensands Companies);
• five funds managed by UBS Global Asset Management (UK) Limited (together having a 23.4 per cent. equity stake in the Greensands Companies); and
• seven Australasian superannuation funds with a combined shareholding of 15.7 per cent. (but individual shareholdings of less than 5 per cent.), advised by Access Capital Advisers (an independent advisory firm).
The remainder of the shares in Greensands Investments Limited is held by investors, none of which has an equity stake of greater than 5 per cent.
Immediately before the first issue of Bonds on the Initial Issue Date, SWI implemented a corporate reorganisation to facilitate the creation of the SWS Financing Group within the Group. This involved the Issuer transferring its shares in its then immediate subsidiary, SWSG, to SWI; SWI transferring its shares in the Issuer to SWS; and SWS assuming certain existing intra-group indebtedness that SWSG incurred to the Issuer in connection with the First Aqua Acquisition.
The SWS Financing Group consists of SWSGH, SWSH, SWS, the Issuer and the Pension Companies (which act as trustees of two pension schemes in which SWS participates). The sole purpose for the creation of the SWS Financing Group was to facilitate the refinancing and future financing of the operating and capital requirements of SWS through the issuance of Bonds, other instruments of financial indebtedness and credit facilities, from time to time, incurred by the Issuer and SWS. The Issuer may on- lend the proceeds of Financial Indebtedness incurred by it to SWS pursuant to the Issuer/SWS Loan Agreements.
The Initial Issue Date On the Initial Issue Date, the Issuer issued the following Sub-Classes of Bonds:
(i) £350,000,000 Series 1 Sub-Class A1 Wrapped 6.192 per cent. Bonds due March 2029;
(ii) £150,000,000 Series 1 Sub-Class A2a Wrapped Index-Linked Bonds due March 2034;
(iii) £35,000,000 Series 1 Sub-Class A2b Wrapped Limited Index Bonds due March 2034;
(iv) U.S.$483,000,000 Series 1 Sub-Class A3 Wrapped Floating Rate Bonds due March 2007;
(v) £350,000,000 Series 1 Sub-Class A4 Unwrapped 6.640 per cent. Bonds due March 2026;
(vi) £150,000,000 Series 1 Sub-Class A5 Unwrapped Index-Linked Bonds due March 2023;
(vii) £120,000,000 Series 1 Sub-Class A6 Unwrapped Step-Up Floating Rate Bonds due March 2013; and
22 (viii) £250,000,000 Series 1 Sub-Class B1 Unwrapped Step-Up Fixed/Floating Rate Bonds due March 2038
(together, the “Series 1 Bonds”).
The Issuer applied the proceeds of the Series 1 Bonds, the Mezzanine Facilities and the Initial Term Facility to settle certain termination payments under existing hedging contracts terminated on or prior to the Initial Issue Date and to make advances to SWS under the Initial Issuer/SWS Loan Agreement to enable SWS to repay on the Initial Issue Date all existing intercompany indebtedness owed by it to the Issuer. The Issuer applied the repayment proceeds of the existing intercompany indebtedness owed to it by SWS among other things (i) to repay its then existing indebtedness to SWI, (ii) to pay all amounts outstanding under the term facility of the Bridge Facility Agreement and (iii) to meet certain transaction fees and expenses.
SWS applied the proceeds of its issue of SWS Preference Shares on the Initial Issue Date (together with any monies received under the Initial Issuer/SWS Loan Agreement and not required to be applied in repayment of existing indebtedness to the Issuer): (i) to discharge the obligations of SWS under the Bridge Facility Agreement, (ii) to fund the Capex Reserve Account and its O&M Reserve Account, (iii) to make an initial payment to the Debt Service Payment Account, (iv) to pay certain transaction fees and expenses, and (v) for general corporate purposes.
The advances made by the Issuer to SWS under the Initial Issuer/SWS Loan Agreement on the Initial Issue Date reflect the corresponding amount and terms of borrowing by the Issuer of each Sub-Class of Series 1 Bonds and each borrowing under the Mezzanine Facility Agreements and the Initial Term Facility on the Initial Issue Date and, to the extent that such borrowing was hedged under a Hedging Agreement, the terms of such Hedging Agreement.
The U.S.$483,000,000 Series 1 Sub-Class A3 Wrapped Floating Rate Bonds due March 2007 and the £120,000,000 Series 1 Sub-Class A6 Unwrapped Step-Up Floating Rate Bonds due March 2013 were redeemed on 30 June 2005 (the “Series 1 Redeemed Bonds”).
The Second Issue Date On 5 July 2004, Artesian advanced the Second Artesian Term Facility to the Issuer.
The advance made by the Issuer to SWS under the Second Issuer/SWS Loan Agreement reflects the corresponding amount and terms of borrowing by the Issuer under the Second Artesian Term Facility, the repayment date being 30 September 2032.
The Third Issue Date On the Third Issue Date, the Issuer issued the following Sub-Classes of Bonds:
(i) £350,000,000 Series 2 Sub-Class A7 Wrapped 5.00 per cent. Bonds due March 2021; and
(ii) £150,000,000 Series 2 Sub-Class A8 Wrapped 5.00 per cent. Bonds due March 2041,
(together, the “Series 2 Bonds”).
The advances made by the Issuer to SWS under the Third Issuer/SWS Loan Agreement reflect the corresponding amount and terms of borrowing by the Issuer of each Sub-Class of the Series 2 Bonds. SWS applied the advances made by the Issuer under the Third Issuer/SWS Loan Agreement to, among other things, prepay the advances made by the Issuer to SWS under the Initial Issuer/SWS Loan Agreement corresponding to the Series 1 Redeemed Bonds.
The Fourth Issue Date On the Fourth Issue Date, the Issuer issued the £200,000,000 Sub-Class A9 4.50 per cent. Wrapped Bonds due 2052 (the “Series 3 Bonds”).
The advances made by the Issuer to SWS under the Fourth Issuer/SWS Loan Agreement reflect the corresponding amount and terms of borrowing by the Issuer of the Series 3 Bonds. SWS applied the advances made by the Issuer under the Fourth Issuer/SWS Loan Agreement to general corporate purposes.
23 The Fifth Issue Date On the Fifth Issue Date, the Issuer issued the £300,000,000 Sub-Class A10 Wrapped 5.125 per cent. Bonds due September 2056 (the “Series 4 Bonds”).
The Advances made by the Issuer to SWS under the Fifth Issuer/SWS Loan Agreement reflect the corresponding amount and terms of borrowing by the Issuer of the Series 4 Bonds. SWS applied the advances made by the Issuer under the Fifth Issuer/SWS Loan Agreement to general corporate purposes.
24 FIGURE 1 – OWNERSHIP STRUCTURE
Greensands consortium investors
100% Greensands Holdings Limited 100%
Intermediate holding companies 100%
Greensands Investments Limited
100%
Southern Water Capital Limited (SWC)
100%
Southern Water Investments Limited (SWI) 100% Non-Regulated Companies 100%
Southern Water Services Group Limited (SWSG)
100%
SWS Group Holdings Limited (SWSGH)
100%
SWS Holdings Limited (SWSH)
100%
Southern Water Services Limited (SWS)
100% 100%
Pension Companies Southern Water Services (Finance) Limited (Issuer)
25 Figure 1 illustrates the simplified ownership structure of the SWS Financing Group and provides an overview of the ownership structure of the SWS Financing Group as follows:
– The Pension Companies and the Issuer are wholly owned subsidiaries of SWS.
– The entire issued ordinary share capital of SWS is held by SWSH, whose entire issued share capital is held by SWSGH.
– SWSGH is a wholly owned subsidiary of Southern Water Services Group Limited (“SWSG”), which is a wholly owned subsidiary of SWI.
– SWI is a wholly-owned subsidiary of SWC.
– The Greensands consortium investors, who together own the entire issued share capital of Greensands Holdings Limited, are described above.
– Each of SWSGH and SWSH is a special purpose vehicle incorporated to be the holding company of SWS and the Issuer and (in the case of SWSGH) SWSH, to enter into the Finance Documents and in particular to grant security over the shares of its respective subsidiary pursuant to the Security Agreement.
26 FIGURE 2 – PROGRAMME STRUCTURE
SWC
Class A2 Preference Shares Class A1 Preference Shares and Class B Preference SW1 Customer Shares Revenues SWSG SWS/ SWSG Loan Guarantee and Security SWSGH Security Guarantee and Security Trustee SWSH Guarantee and Security
Finance Lessors SWS Issuer/SWS Loan Finance Leases Agreement Guarantee and Other Authorised Principal and Interest Bondholders/ Security Bond Proceeds Credit Facility Issuer 1 Providers Authorised Credit Facilities (1) Principal and Interest Bond Trustee
DSR Financial Liquidity Hedging Agreements O&M Reserve Guarantee Financial Facility Facility Fee Guarantee
Senior and Junior Mezzanine Facilities Hedge O&M Reserve DSR Liquidity Senior and Junior Financial Counterparties Facility Providers Facility Providers Mezzanine Facility Guarantors of Providers Wrapped Bonds
Security Trust and Intercreditor Deed
Note:
1 Including Initial RCF, Initial Term Facility, Second Artesian Term Facility and Second Revolving Credit Facility
27 Figure 2 provides an overview of the Programme, as follows:
– The Issuer may, under the Programme, issue Class A Wrapped Bonds (guaranteed as to scheduled principal and interest by a Financial Guarantor), Class A Unwrapped Bonds, Class B Wrapped Bonds (guaranteed as to scheduled principal and interest by a Financial Guarantor) and Class B Unwrapped Bonds. On the Initial Issue Date, the Issuer issued the Series 1 Bonds, on the Third Issue Date the Issuer issued the Series 2 Bonds, on the Fourth Issue Date the Issuer issued the Series 3 Bonds and on the Fifth Issue Date the Issuer issued the Series 4 Bonds.
– The Issuer and/or SWS may also borrow money from Authorised Credit Providers under Authorised Credit Facilities for funding the working capital and capital expenditure requirements of SWS, to service and repay the SWS Financing Group’s indebtedness and for the SWS Financing Group’s general corporate purposes. On the Initial Issue Date, the Issuer entered into the Initial RCF Facility Agreement and also borrowed the Initial Term Facility. In July 2004, Artesian advanced the Second Artesian Term Facility to the Issuer. In June 2005, SWS entered into the Second Revolving Credit Facility Agreement. See Chapter 7 “Summary of the Financing Agreements” under “Additional Resources Available – Initial Authorised Credit Facilities and the Second Artesian Term Facility”.
– The Issuer may additionally borrow money from O&M Reserve Facility Providers under O&M Reserve Facility Agreements for funding the operating and maintenance expenditure of SWS.
– The Issuer, on the Initial Issue Date, borrowed the Senior Mezzanine Facility and the Junior Mezzanine Facility from the Initial Mezzanine Facility Providers. SWC is now the sole Mezzanine Facility Provider.
– The Class A1 Preference Shares and the Class B Preference Shares are owned by SWC.
– Finance Lessors may provide financing of equipment to SWS.
– The terms under which the Issuer and/or SWS may incur financial indebtedness, including issuing Bonds under the Programme, are set out in the CTA.
– The Issuer is required to on-lend to SWS the proceeds of each Series of Bonds and each advance to the Issuer under each Authorised Credit Facility (other than any DSR Liquidity Facility – see below), pursuant to Issuer/SWS Loan Agreements. All indebtedness owing by SWS to the Issuer under each Issuer/SWS Loan Agreement will reflect the corresponding amount and terms of borrowing by the Issuer under the relevant Sub-Class of Bonds or the relevant Authorised Credit Facility or, where such borrowing is hedged under a Hedging Agreement, the notional amount and terms of such Hedging Agreement. Repayment by SWS of this indebtedness to the Issuer is capable of producing funds to service any payments due and payable on the Bonds and any relevant Authorised Credit Facilities.
– The Issuer is required to hedge its interest rate and currency exposure under the Bonds by entering into interest and currency swap agreements and other hedging arrangements with Hedge Counterparties in accordance with an agreed hedging policy. The economic effect of the hedging will be passed on to SWS through the relevant Issuer/SWS Loan Agreement.
– The Issuer’s obligations to repay principal and pay interest on the Bonds and the Mezzanine Debt and under each Authorised Credit Facility to which it is party as borrower are intended to be met primarily from the payments of principal and interest received from SWS under the Issuer/SWS Loan Agreements. The Initial Issuer/SWS Loan Agreement, the Second Issuer/SWS Loan Agreement, the Third Issuer/SWS Loan Agreement, the Fourth Issuer/SWS Loan Agreement and the Fifth Issuer/SWS Loan Agreement provide, and each other Issuer/SWS Loan Agreement will provide, for payments to become
28
due from SWS to the Issuer on dates and in amounts that match the obligations of the Issuer to its various financiers under its financial arrangements plus a small profit margin.
– The Issuer may draw under any DSR Liquidity Facility provided to meet any shortfall in the amounts available to it to meet interest payments on the Class A Bonds and the Class B Bonds and certain other payments ranking in priority to or pari passu with the Class A Bonds and Class B Bonds of such Series (excluding any principal repayments on Class A Bonds and any principal repayments and Subordinated Coupon Amounts on Class B Bonds).
– The respective obligations of SWS and the Issuer to its Secured Creditors are guaranteed by each other in favour of the Security Trustee. SWSH and SWSGH in turn guarantee in favour of the Security Trustee the respective obligations of SWS and the Issuer and the obligations of each other.
– The obligations of each of SWS, the Issuer, SWSH and SWSGH are secured in favour of the Security Trustee under the terms of the Security Agreement.
– The guarantees and security granted by the Obligors are held by the Security Trustee for itself and on behalf of the Secured Creditors under the terms of the STID, which regulates the rights and claims of the Secured Creditors against the Obligors and the duties and discretions of the Security Trustee.
29
CHAPTER 4 DESCRIPTION OF THE SWS FINANCING GROUP
Introduction
SWS took over its functions as a successor to the former Southern Water Authority in respect of water supply and wastewater services on 1 September 1989 and its principal activity is the provision of water and wastewater services.
It operates under a licence which has a 25 year notice period (see Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales” under “Termination of a licence”). The main provisions of the Licence are described in Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales” under “Licences”.
A copy of the Licence and Amendments made on 14 August 2007 and 5 August 2008 can be viewed on Ofwat’s website (www.ofwat.gov.uk).
SWS is the seventh largest water and wastewater services company in England and Wales, based on turnover (source: Financial Performance and Expenditure of the Water Companies in England and Wales 2007/08 Report; Ofwat, September 2008).
For the year ending 31 March 2008, SWS had a profit before tax of £102 million on turnover of £619 million. In the year ended 31 March 2008, SWS employed an average of approximately 1,611 full time, part time and agency staff. SWS’ RCV was £3,248 million as at 31 March 2008.
SWS was incorporated under the Companies Act 1985 and registered in England and Wales on 1 April 1989 with limited liability under number 02366670. The registered office of SWS is Southern House, Yeoman Road, Worthing, West Sussex BN13 3NX. SWS is a wholly-owned direct subsidiary of SWS Holdings Limited and its authorised share capital is £46,050,000 divided into 46,050,000 ordinary shares. 56,000 ordinary shares have been issued of which all have been fully paid up. The only subsidiaries of SWS are the Issuer and the Pension Companies.
30 The Area Served
31 SWS operates in an area of approximately 10,550 km2 in the counties of Kent, East and West Sussex, Hampshire and the Isle of Wight, and small parts of Wiltshire, Berkshire and Surrey (the “Region”).
Regulation SWS is principally regulated under the provisions of the WIA. The Secretary of State for Environment, Food and Rural Affairs (the “Secretary of State”) and the Water Services Regulation Authority (“WSRA”) are the principal regulators of SWS. (See Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales” for details on the regulation of Regulated Companies (as defined therein) including SWS).
SWS’ area of appointment can be varied in certain circumstances by way of, for example, a so-called “inset” appointment (see Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales” under “Licences - Termination of a licence”). Currently, the only inset appointment in SWS’ original area of appointment is in respect of Tidworth Army Camp (“Tidworth”), which is on the boundaries of both SWS’ and Wessex Water Services Limited’s areas of appointment. Operation of Tidworth’s water supply and wastewater services, previously undertaken by the Ministry of Defence, was put out to tender in 1996 and the tender was won by Thames Water Utilities Limited.
Albion Water has applied to WSRA to be a sewerage undertaker for a site at Knowle Village, near Fareham, Hampshire. The site is a mixed-use development that, once complete, will consist of approximately 700 residential properties and some commercial properties. The site is at present served by a private sewerage system. Ofwat proposes to appoint Albion Water as the statutory sewerage undertaker for the site subject to the conclusions drawn from a public consultation that closed on 12 December 2008.
SWS has had recent discussions with Independent Water Networks Limited (“IWNL”) regarding IWNL’s intention to apply for inset applications in the Region but has not entered into any agreements with it for the eventuality that IWNL is granted inset appointments.
Water Supply Water Supply - Approximate Base Statistics 2007/08
Description Value Population served...... 2.3m Properties served...... 1.05m Domestic premises...... 974,889 Business/non-domestic premises ...... 68,383 Length of mains ...... 13,588km Number of water treatment works...... 99 Number of main reservoirs Number of dams and impounding reservoirs ...... 4 Number of service reservoirs ...... 231 Average daily supply (million litres) ...... 562 from groundwater 69% from surface water 31%
Of the average supply of 562 million litres of water per day during the year 1 April 2007 to 31 March 2008, approximately 74 per cent. was supplied for domestic use and approximately 26 per cent. was supplied for non-domestic and industrial use.
32
In addition, SWS supplied approximately 22 million litres of water a day in aggregate (representing approximately 4 per cent. of the total water supplied by SWS) to South East Water, Wessex Water and Folkestone & Dover Water under bulk supply agreements. This includes some 9.0 million litres a day supplied to South East Water (formerly Mid Kent Water) from Burham Water supply works as part of the River Medway Scheme and 5.7 million litres of water a day to South East Water pursuant to the Belmont Scheme (comprising three boreholes owned and operated by SWS within South East Water’s appointed area and associated pipelines), 1.76 million litres a day to Folkestone & Dover Water from Deal High service reservoir and 5.03 million litres a day to South East Water from Weir Wood Reservoir. By a long-standing arrangement, South East Water inputs water abstracted from two of its sources into the Eastling Main pipeline for transfer to another of its water supply works. Approximately 0.01 million litres per day of treated water was received from Sutton and East Surrey Water & Folkestone and Dover Water pursuant to bulk supply agreements.
In September 2004, SWS completed a bulk supply arrangement with Portsmouth Water (“Portsmouth”) for SWS to be supplied with treated water to meet peak summer demands in the Sussex North area (the “Portsmouth Scheme”). The Portsmouth Scheme provides for the transfer of up to 15 million litres a day from the boundary of Portsmouth’s supply area to SWS’ Hardham water supply works via a 10.5 km pipeline constructed in the K3 Period. During the year 1 April 2007 to 31 March 2008, an average of 1.28 million litres per day were transferred.
As of 31 March 2008, SWS supplied water to 51 large users (customers with annual water consumption in excess of 50 million litres per day) which, in the 12 month period to 31 March 2008, accounted for approximately 4.1 per cent. of the total volume of water supplied. SWS could potentially be subject to competition in respect of these customers (see Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales”).
As at 31 March 2008, approximately 334,015 households, or approximately 35 per cent. of total households supplied by SWS, had their water measured by meters, compared with 9.6 per cent. of household customers in 1992/93.
Water is treated at 99 water treatment works and is distributed to approximately 1,043,000 premises through a network of approximately 13,588 km of water mains. SWS treats water from 119 sources in the Region with approximately 69 per cent. of water supplied coming from groundwater sources (predominantly chalk), approximately 26 per cent. coming from rivers, and the remaining approximately 5 per cent. being abstracted from reservoirs.
At five of the six water treatment works supplied by river sources, underground sources or bankside storage facilities can be utilised to help provide continuity of supply if the river intake is closed due to a temporary pollution hazard.
A central part of the water resources network in Kent and the eastern part of Sussex is the River Medway Scheme, incorporating the Bewl Water Reservoir, originating from a 1968 Private Act of Parliament and a subsequent agreement between SWS and South East Water. South East Water is entitled to 25 per cent. of the yield of water under this River Medway Scheme.
SWS owns, operates and maintains 367 water-pumping stations, as well as 4 impounding reservoirs which have a total storage capacity of approximately 42,390 million litres, the largest, Bewl Water Reservoir (Kent), having a gross storage capacity of 31,000 million litres.
In the 12 month period ending 31 March 2008, approximately 83 million litres per day were estimated to be lost through leakage. About 80 per cent. of this leakage is estimated to be from SWS’ pipes and the remainder from pipes owned by households and businesses. SWS met its annual leakage target for the year ending 31 March 2008 of 92 million litres per day and has achieved its rolling three-year average leakage target of 92 million litres per day for the three-year period ending 31 March 2008 set by Ofwat. In the year ending 31
33
March 2007, SWS had the lowest leakage rate of the ten water and sewerage companies (source: Ofwat Security of Supply 2006-07 Report). The leakage target for the year ending 31 March 2009 remains 92 million litres per day.
In line with industry norms, most of SWS’ mains are constructed of iron, asbestos cement and plastics, with iron being the most common material.
In accordance with the 2004 Periodic Review, SWS plans that of its approximately 13,588 km of mains, 145 km (or 1.1 per cent.) will be renewed in the period 2005 to 2010 to maintain Ofwat “stable” serviceability.
Since 1990/91, the amount of water put into supply by SWS has decreased by approximately 20 per cent. as a consequence of leakage control, metering and falling demand from commercial customers. However, SWS forecasts that the total volume of water put into supply in a dry year will increase by approximately 2.5 million litres a day per annum in the period 2005 to 2010 as a consequence of an underlying increase in population in the Region.
During the current Periodic Review Period, SWS has agreed a £348 million investment programme with Ofwat (2007/08 prices). The principal investment targets relating to SWS water services include £126 million for the maintenance of water treatment works, reservoirs and pumping stations, £119 million in maintaining the water distribution system, £17 million in drinking water quality improvements and £86 million on water resources and meeting the needs of new housing development and growth.
SWS has developed a water resources strategy (the “SWS Water Resources Strategy”) for the next 25 years, which was audited by W.S. Atkins Consultants Ltd., an Ofwat reporter, and submitted for approval to Ofwat and the EA. The plan developed by SWS in order to achieve this strategy is updated every year and submitted to the EA and Ofwat. It includes details of levels of service, population and housing estimates, per capita consumption, water efficiency initiatives, leakage and metering. It also gives details of SWS’ position with regard to the supply/demand balance and the proposed capital programme to ensure future demands are met, as well as providing key data relating to issues such as climate change and catchment abstraction management strategies for the future.
In parallel with the SWS Water Resources Strategy, SWS has, together with other water companies in the South East of England, developed a joint water resources strategy for the South East of England as a whole. This takes the form of a cooperative, non-binding strategy subscribed to by the relevant Regulated Companies and endorsed by Ofwat and the EA. SWS has completed a number of investment schemes within the context of the SWS Water Resources Strategy, including:
• upgrading the treatment process at Beauport Water Supply Works, Hastings;
• installing a treatment plant to remove nitrate at Luton Water Supply Works, Chatham to ensure the final water leaving the works complies with water quality regulations;
• constructing a pumping station at Tenants Hill, Worthing to allow more water from the Sussex Coast resource zone to be pumped to the Sussex North resource zone in times of peak demand;
• upgrading the peak output of Sandown Water Supply Works, Isle of Wight, to help meet peak summer demands on the Isle of Wight;
• refurbishing Weir Wood Reservoir, East Grinstead, to help meet peak demands in the Sussex North water resource zone;
• refurbishing Northbrook Water Supply Works, Worthing, treatment facilities so that contaminants in the groundwater aquifer can be removed, allowing the water to be pumped into supply; and
• refurbishment of filters at Findon Water Supply Works, Worthing, to enable more water to be abstracted from the source.
34
Network enhancement and reinforcement schemes are also ongoing or planned. Schemes include:
• replacement of Victorian water mains in central Brighton; and
• developing new trunk and distribution main systems in Swale, Kent, to meet future demands arising from major new housing and commercial developments planned for the area. Investigations into increasing the capacity at Bewl Water Reservoir, to meet future demand in Kent, have included detailed investigations into the civil engineering, environmental and social impacts of raising the reservoir level. The findings will be used to decide whether to proceed with this or an alternative scheme in the K5 Period. Similar investigations have been undertaken into the development of a new source in Sussex to meet future demands in the Sussex North resource area for which a planning application was submitted on 16 December 2008.
SWS is also undertaking several more general water resource investigations including further development of demand forecasts, enhancing drought plans and technical and environmental assessment of water resource development options.
As part of the SWS Water Resources Strategy, in Sussex, SWS has adopted a policy that will require the installation of a meter in residential properties when a change of owner-occupier occurs. Under this scheme, SWS plans to install approximately 60,000 meters during the K4 Period.
As part of the 2009 Periodic Review, SWS is required to prepare a new Water Resources Management Plan (“WRMP”) which sets out in detail how it proposes to ensure that there is sufficient security of water supplies to meet the anticipated demands of all its customers over the 25-year planning period from 2010 to 2035. For the first time, the WRMP is subject to full public statutory consultation with regulators, stakeholders, customers and other interested parties (see Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales”).
The WRMP addresses increased demand as a result of housing growth, the effects of climate change and the need to reduce energy use, and maintenance of high levels of environmental protection. SWS faces a number of challenges in light of increasing constraints on the development of new resources, the complexity of its own separated areas of supply and the need to reach the best regional solution with the other water companies within the Region.
The principal components of the plan are the completion of a programme of universal compulsory metering by 2015, further reductions in leakage and the continued promotion of water efficiency initiatives. There is also a need for new resource developments. It will be the largest water resource programme of works that SWS has promoted, and demonstrates SWS’ commitment to achieving security of supplies for the next 25 years.
SWS published its drought plan in 2008 (the “Plan”), which details how it will continue, during a period of drought, to discharge its duties to supply adequate quantities of wholesome water, with as little recourse as reasonably possible to Drought Permits or Drought Orders (See Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales” under “Management of Water Resources – Drought Planning”). This followed public consultation in 2006 and approval of the Plan in 2008 by DEFRA. The Plan will help SWS provide adequate supplies of water during a drought with as minimal impact as possible on the environment and its customers.
All water supplied is treated at water supply works before distribution. Water quality is monitored by SWS through a programme of regular sampling and analysis. Sampling of water supplies is carried out in accordance with the Water Supply (Water Quality) Regulations 2000 which sets out the number of samples to be taken depending on the volume of water produced or the population served.
35
Fluoride Dosing
SWS does not currently add fluoride to water in any of the areas it supplies. It has a statutory duty to do so under the Water Act 2003 if it is requested by a strategic health authority.
During late 2008, the NHS South Central Strategic Health Authority (“Health Authority”) carried out a public consultation on proposals to add fluoride to water supplies within the Southampton Primary Care Trust area. The Health Authority board are due to consider the outcome of the consultation on 26 February 2009 and then decide whether or not to proceed with a scheme to add fluoride to water supplies.
If the Health Authority decides to add fluoride, then SWS must agree arrangements with the Health Authority for the installation and operation of dosing plants. A legal agreement will be set up for SWS to construct, commission and operate dosing arrangements on behalf of the Health Authority. All costs associated with the installation and operation of fluoridation plants are met by the Health Authority. Under the legislation, the Health Authority must also provide an indemnity to cover SWS for all liabilities which may be incurred in complying with arrangements entered into by SWS pursuant to the Water Act 2003.
It is anticipated that the earliest that dosing is likely to commence if the Health Authority decides to progress a scheme, will be in 2011, allowing time for the agreement and indemnity to be put in place and dosing plants to be designed and constructed.
SWS operates a quality assurance system approved to British Standards Institution (“BSI”) standard ISO 9002. SWS has approved procedures for the production of water up to the supply point from service reservoirs. These are used to monitor the daily activities which control water quality. These procedures are audited by the BSI on a six monthly basis.
Wastewater Services Wastewater – Approximate Base Statistics 2007/08
Description Value Population served...... 4.27m Properties served...... 1.79m Domestic ...... 1,697,600 Business/non-domestic premises ...... 93,400 Length of sewers...... 21,545km Number of wastewater treatment works ...... 369 Number of coastal outfalls/marine treatment works ...... 1 Sewage sludge disposal: % vol. sludge discharged to agriculture ...... 93.3 % vol. sludge discharged to landfill...... 6.7 Number of sewerage pumping stations...... 2,154 Volume of wastewater treated daily...... 1,300Mld
SWS provides wastewater services to approximately 4.27 million people in Kent, Sussex, Hampshire and the Isle of Wight (the “Wastewater Region”). SWS collects and treats approximately 1,300 million litres of wastewater every day via approximately 21,545km of sewers. Approximately one half of the population in SWS’ appointed area resides in urban areas along an extensive coastline. Accordingly, the majority of SWS’ sewage discharge is into estuarial or coastal waters. This includes an average volume of 16.79 million litres per day of trade effluent from approximately 1,066 industrial customers, who have permission to discharge
36
trade effluent, subject to specific controls. These figures exclude storm flows and include any infiltration. A number of factors, including rainfall, may cause flows within SWS’ wastewater network to vary from time to time. In particular, an influx of visitors into the Wastewater Region during the summer holiday period contributes to an increase in the sewage flow.
As at 31 March 2008, SWS owned, operated and maintained 369 sewage treatment works, one coastal outfall and approximately 21,545 kilometres of sewers receiving foul and surface water through a mixture of combined (foul and surface water), separate and partially separate drainage systems. There are 2,154 sewage pumping stations within the Wastewater Region, which form an integral part of the wastewater system.
SWS estimates that approximately 94 per cent. of the wastewater received by it is treated, with the remainder discharged through a sea outfall.
The wastewater system has been constructed principally of clay ware, concrete, brick and iron.
SWS has identified sewers as being either “critical” or “non-critical” based on the methodology developed by the Water Research Council. At 31 March 2008, there were some 6,633 km of “critical” sewers (sewers located in places where their malfunction would cause material disruption) (constituting 30.8 per cent. of the total length of sewers) in the Wastewater Region. Over half of these “critical” sewers have been inspected by closed circuit television as part of an on-going programme to assess their structural condition. In accordance with the 2004 Periodic Review, SWS plans that 56.1 km (or 0.9 per cent. of the total) of “critical” sewers will be renewed or renovated during 2005-2010. At least 113.2 km (or 0.8 per cent. of the total) of “non-critical” sewers are planned to be replaced or renovated over the same period.
Investment in maintaining sewage treatment works has gradually increased over the last ten years and monitoring demonstrates that overall performance has now stabilised. The performance of this group of assets is determined by Ofwat using various measures and is currently reported as “stable”.
SWS’ strategy for sludge disposal is based on environmental factors, planning constraints, the volume of sludge and the unit cost of disposal. The majority of treated sludge is recycled for use as a fertiliser on agricultural land. The recycling of sludge in such a manner is regulated and previous investment in sludge treatment ensures that the strict standards are met. This environmentally sustainable recycling route currently negates the need for other disposal methods. Alternatives, including incineration, are being considered for the longer term, in response to increasing constraints on the use of the agricultural land bank for disposal of sludge derived from human waste.
In the 2008 bathing season the EA tested 81 designated bathing waters in the Wastewater Region for bacteria, physicochemical parameters, and the presence or absence of enteroviruses. In the 2008 bathing season, 80 beaches passed the mandatory compliance standards and one beach failed at Sandgate (Kent). The failure was due to problems with a SWS sewerage pumping station which caused consecutive failures of samples taken in late May. The problem was rectified and all subsequent samples from the bathing water passed the mandatory compliance standards and the higher guideline standards.
Any pollution or drinking water quality incident could result in criminal prosecution leading to the imposition of fines on SWS, civil liability in damages to third parties and/or requirements to clean up or otherwise deal with the effects of contamination and/or operational requirements to upgrade plant and equipment.
During the current Periodic Review Period, SWS has agreed a £1,630 million (2007/08 prices) investment programme with the WSRA. The principal investment targets relating to SWS sewerage services include £554 million for the maintenance of sewage treatment works and pumping stations, £91 million in maintaining the sewer system, £775 million towards environmental quality improvements defined by the EA, £105 million to meet demands from growth and new housing development and £105 million to reduce flooding from sewers.
37
Environmental certification SWS achieved ISO14001 certification in July 2008 which applies to those environmental aspects over which the company has control and over which it can be expected to have an influence. This standard is applicable to any organisation that wishes to:
• implement, maintain and improve an environmental management system
• assure itself of its conformance with its own stated environmental policy
• demonstrate conformance
• ensure compliance with environmental laws and regulations
• seek certification of its environmental management system by an external third party organisation
• make a self-determination of conformance
The SWS environmental management plan 2008-2009 is available to all employees who have responsibility for assisting in its delivery and in contributing to company environmental performance.
SWS achieved ISO 9001:2000 certification in June 2007 for the operation of its quality management system for the collecting, checking and reporting of non-financial data for regulatory reporting purposes.
Rates and Billings Water supply and wastewater services are charged separately and, therefore, charges are set (within the overall level set by Ofwat) so as to reflect the average costs of providing each service for each class of customers. Each year, SWS submits a pricing structure to Ofwat (within the overall limit set by Ofwat) for approval by Ofwat. The average SWS household bill for water supply and wastewater services for the 2008/09 year is £359, comprising £126 for water supply and £233 for wastewater services. During the year ended 31 March 2008, approximately 59 per cent. of turnover in respect of water and wastewater customers relates to supplies to unmetered customers, and approximately 41 per cent. to customers who pay by meter.
Charges for customers with unmetered water supplies are based on the rateable value of their premises, together with a standing charge, for both water supply and wastewater services. Charges are billed in advance on an annual basis with payment annually, half-yearly or (with the agreement of SWS) by instalments.
Charges for customers with metered water supplies are based on the measured volume of water supplied, together with a standing charge generally according to the size of the meter, for both water supply and wastewater services. Wastewater charges include a fixed or assessed allowance against volume to reflect water supplied that is not discharged to a sewer. Charges for small meters are billed half-yearly, and more frequently for larger meters.
SWS’ contracts with customers are governed by English law.
No direct charge can be made to highway authorities for highway drainage connected to wastewater infrastructure, the cost of which is recovered through wastewater charges to customers as a whole.
Domestic Customers Most domestic customers are unmetered. Although the domestic rating system was discontinued in 1990 (under the provisions of the UK Local Government Finance Act 1988), water companies were originally allowed to continue to use rateable values (as at 31 March 1990) for charging until 1 April 2000 under the WIA. Following a review of water and wastewater charges in England and Wales, the Government decided to allow companies to continue using the system after that date. At the same time it proposed changes designed to encourage the use of meters for domestic properties.
Certain changes have been implemented by the WIA 99 which still grants domestic customers the right:
38
• to resist water metering in their current homes where they are not using water for non-essential purposes (such as swimming pools and sprinklers);
• to have a free meter installed if they wish to have one, where this is practicable; and
• where they have taken up the right to have a free meter installed, to revert to an unmetered basis of charging within 12 months if they so choose.
In 2007 the Government consulted on water metering in areas of serious water stress and new regulations came into force on 1 October 2007. Under Rregulation 4(1) of the amended Water Industry (Prescribed Conditions) Regulations 1999 the Secretary of State may, after consulting the Environment Agency, determine the whole or any part of a water undertaker’s area to be an area of serious water stress. On 28 November 2007 the Secretary of State notified SWS that the whole of its water supply area had been determined to be an area of serious water stress for the purposes of the Regulations.
The ability of domestic customers to resist metering is removed for premises in areas of serious water stress provided that those premises are subject to a programme for the fixing of charges by reference to volume, as specified in the water undertaker’s final water resources management plan. SWS has included plans for universal metering in the period 2010-15 in its final water resources plan to be published at the end of 2009.
In addition, provisions of the WIA, as amended by the WIA 99, serve to:
• prevent disconnection of domestic customers and other protected premises for non-payment;
• empower the Secretary of State to make provisions which protect vulnerable customers with high essential water use, who live in homes with meters, from higher than average bills; and
• prevent charges schemes from taking effect until approved by Ofwat and give Ofwat a duty to take into account guidance from the Secretary of State.
In calculating the wastewater charges of metered domestic customers, the volume of clean water supplied is used as the basis of the charge less a fixed allowance of 7.5 per cent. of such volume made in respect of water not discharged to a sewer (for example, water used outside the home for garden watering and washing cars).
Non-domestic customers Most industrial and other non-domestic customers are metered. In calculating the wastewater charges of industrial and commercial metered customers, the volume of clean water supplied is used as the basis of the charge less a fixed allowance of 5 per cent. of such volume made in respect of water not discharged to a sewer. Certain industrial and commercial metered customers receive a higher allowance where a significantly higher volume of water supplied is not discharged to a sewer. Trade effluent is normally charged separately on a formula basis taking account of the volume of effluent, its strength and costs of removal and treatment.
Collections SWS’ collection methods include full payment or instalments using direct debit, standing orders, banks, the internet, post office, PayPoint or direct payment to SWS, through to doorstep collections, debt collection agencies, the Department for Works and Pensions and recourse to court procedures in appropriate circumstances. Disconnection of domestic customers from the water supply network for failure to pay charges is prohibited following the introduction of the WIA 99. In the light of this, SWS has reviewed the underlying collections risk of its receivables and, accordingly, its bad debt charge for the year ended 31 March 2008 is £17.6 million. Industrial and commercial customers are subject to a range of actions, including disconnection and court proceedings where failure to settle charges occurs.
Revenue Deviations from Ofwat’s Projections Historically, SWS has not been protected, in respect of each Periodic Review Period, against decreased revenue arising from any revenue deviations during that Periodic Review Period from Ofwat’s projections for
39
such Periodic Review Period, including demographic changes affecting SWS’ customer base, the loss of a major customer, unexpected reductions in customers or reduction in volumes consumed or discharged by customers, and loss of business through inset appointments.
Accordingly, at Periodic Reviews Ofwat has factored into its projections assumptions about numbers of customers and volumes consumed or discharged. Until the following Periodic Review, SWS has borne the risk that actual numbers of customers and volumes consumed or discharged will fall short of the assumptions reflected in the RPI+K price cap but will equally get the benefit of any out-performance.
However, for Periodic Review 2009, Ofwat has said it will introduce a “Revenue Correction” mechanism covering the AMP5 Period. Under the mechanism, the revenue requirements for the next review period will be reduced or increased by the amount of any under-recovery or over-recovery of revenues from charges in the tariff basket between 2010 and 2015. It will also include an adjustment so that companies have an incentive to maintain accurate billing records. This incentive would operate principally by increasing or decreasing the revenue correction by an “efficient billing factor” (being the cost that an efficient company incurs in finding and billing an additional property) for every property actually found and billed by the company above or below the number that Ofwat expects.
Since actual out-turn revenues are used as the basis for the setting of price limits for the subsequent five-year period, any deviation from revenue projections in the previous five-year period may be reflected in such price limits.
In certain circumstances, SWS may apply for an IDOK as described in Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales” under “Economic Regulation - Interim Determinations of K”.
Capital Investment Programme The Final Determination for the five year period starting on 1 April 2005 (the “K4 Period”) sets out a level of investment for capital projects (both new projects and asset maintenance) of £1,978 million (at 2007/8 prices). This amount has been taken into account by Ofwat in determining SWS’ RCV over the course of the K4 Period, and SWS will be permitted to recover in respect of such amount through customer charges its depreciation costs and an allowed return intended to compensate it for financing costs and provide a permitted return of capital. Ofwat also defines the obligations associated with that investment and sets out target implementation dates. Approximately £1,630 million of this expenditure relates to wastewater services, with the balance relating to water supply projects.
The following table summarises the levels of capital expenditure over the period 2005 to 2010 as set by Ofwat.
Capital expenditure (net)
Five-year total
Water Sewerage Total (£m)
Expenditure Base service — Infrastructure renewals expenditure 119 91 210 Base service — Non-infrastructure capital maintenance 126 554 680 Supply/demand balance 86 105 191 Quality enhancements 17 775 792 Enhanced service levels 0 105 105
40
Capital expenditure (net)
Five-year total
Water Sewerage Total Total 348 1,630 1,978 £ per property per year 69 179 248
SWS’ capital programme is the fourth largest in the industry. The two significant categories of construction works contracts under which work is being performed pursuant to the Final Determination for the K4 Period are the Single Entity Contract and the Utility Service Contracts (each as defined below).
The “Single Entity Contract” is the contract under which SWS outsources some of its key capital investment programme work to 4Delivery Limited (“4D”), a joint venture vehicle owned by United Utilities (40 per cent.), Costain (40 per cent.) and MWH (20 per cent.). Under the Single Entity Contract, 4D is required to manage, design and deliver 260 schemes, which are all stand-alone construction projects for the modification or extension of existing water mains, sewers, water supply works and wastewater treatment works. Most of the schemes have an individual value of between £1 million and £5 million each, although a small number of schemes have a value of up to £50 million. The total value of the Single Entity Contract is approximately £716 million. The pricing structure of the contract is based on reimbursable actual costs with a target cost and a maximum entitlement set at programme level. Any costs in excess of such target cost are borne by SWS and 4D on an equal basis up to the maximum entitlement. Costs above the maximum entitlement are borne by 4D up to the limit of a cap specified in the contract. Any costs savings in delivering the schemes below the contract target cost will be shared equally between SWS and 4D.
A £30 million performance bond has been issued to SWS in respect of 4D’s obligations under the Single Entity Contract. In addition, 4D’s obligations under the Single Entity Contract are guaranteed by its parent companies to a total value of £57 million. The Single Entity Contract also requires further guarantees to be obtained from first tier sub-contractors up to a value of £65 million.
On 31 March 2005, the Security Trustee, acting on behalf of the Majority Creditors, granted SWS a waiver in respect of certain aspects of the Single Entity Contract described above that do not comply with the Outsourcing Policy. The waiver protects SWS against the following non-exhaustive list of actual or potential non-compliances:
• there is no requirement in the Single Entity Contract for the parent guarantors to be rated not less than A-from S&P, A3 from Moody’s or A-from Fitch or for performance bonds to be in an amount of not less than 10 per cent. of the contract value;
• there is no requirement to replace the parent company guarantees if the credit rating of the guarantors or financial institution falls below the required levels;
• the aggregate liability of the contractor under the Single Entity Contract is subject to a limit of less than the value of the Single Entity Contract; and
• the Single Entity Contract might result in SWS sub-contracting, in any year, in excess of 50 per cent. of (a) its total Projected Operating Expenditure in such year and (b) its total Capital Expenditure in such year to any single Contractor.
The Single Entity Contract included a provision for an extension up to an additional four years at the discretion of SWS. This contract has now been extended until 2015.
41
The “Utility Services Contracts” or “USC” comprise a number of contracts for small scale utilities works (with the majority up to a maximum value of approximately £100,000 each), including construction works and also associated management activities.
The contracts, which account for approximately £400 million of the capital expenditure for the K4 Period, currently include:
• water distribution – Clancy Docwra (approximately £20 million per year). Under the relevant USC, pipelaying and construction activities previously carried out by SWS have been outsourced;
• sewerage – Holleran, Mouchel Parkman JV (approximately £25 million per year);
• waste management – Viridor Waste Management (approximately £13 million per year); and
• mechanical and electrical maintenance and renewals – Morrison Utility Services (approximately £35 million per year).
The mechanical and electrical contract commenced in 2003 for an initial period of three years and has been extended to April 2009. The water distribution and sewerage contracts were entered into in June 2004 for a three year period with options to extend by two years. The waste management contract commenced in August 2004 for a period of seven years.
SWS manages and controls the USC through dedicated contract management teams and retains authority for all works. To manage performance, key performance indicators have been identified and are monitored on a monthly basis.
The contractors’ obligations under the water distribution and sewerage contracts are guaranteed by their respective parent companies and backed by a performance bond with a predetermined value equal to 10 per cent. of the annual value of the relevant contract.
The water distribution, sewerage, and mechanical and electrical maintenance and renewals contracts which expire in 2009 are the subject of a competitive tender process with award expected by April 2009. This tender process will be designed to effect the framework term service contracts as specified in the next paragraph.
The Term Service contracts for Water Operations, M&E Operations and Sewerage Operations collectively referred to as “the Multi-Services Framework Contracts” (“MSF”), if awarded will be SWS’ procurement vehicle for delivery of:
• water distribution – Distribution system repairs, maintenance and installation (approximately £20 million per year), previously carried out by Clancy Docwra plus meter installation including call centre provision (approximately £5 million per annum);
• sewerage – Sewerage system repairs, maintenance and installation (approximately £25 million per year), previously carried out by Holleran, Mouchel Parkman JV; and
• mechanical and electrical maintenance and renewals – (approximately £35 million per year), previously carried out by Morrison Utility Services.
The proposed contracts will be for the three workstreams above and could be regionally based or could be separated for the Eastern and Western halves of the SWS’ region, and will commence on 1 April 2009 for six years, with an SWS option to extend for a further 5 years. The contracts are based on the NEC3 Term Service Contract June 2005 and the NEC3 Engineering and Construction Contract June 2005 (with amendments June 2006), as amended by SWS.
The contracts are created as framework contacts, for both planned and reactive services, with work being called off by SWS upon the issue of Work Orders.
42
Payment for each Work Order is calculated either as priced services (i.e. using the contractual price list or fixed by agreement upon issue of the Works Order); or on a cost reimbursable basis.
Each contract will require the contractor to supply a Single Performance Bond in a sum of £1 million. There will be retentions of 3 per cent. up to retention caps of £500,000. Guarantees from the parent companies of the relevant contractor will be required to cover each contract, subject to the same limitation and exclusions of liability as the contractor.
If SWS does not incur the expenditure necessary to complete the delivery of a defined obligation during the relevant Periodic Review Period, Ofwat would be entitled to reduce SWS’ RCV to reflect this. Such reduction may be implemented by Ofwat by way of an IDOK (if the amount of expenditure which has not been incurred is material), or otherwise at the next Periodic Review. Ofwat should then include the relevant defined obligation (and associated capital expenditure) as part of its determination of the level of investment and associated defined obligations for the subsequent Periodic Review Period. In addition to any RCV reduction, Ofwat would be entitled to claw back any benefit received by SWS in the original Periodic Review Period in relation to the defined obligations which have not been fulfilled.
SWS’ ability to fulfil defined obligations, and the level of associated expenditure, can be affected by circumstances and third parties (such as planning authorities) beyond SWS’ control. One large scheme (in the order of £300 million) where SWS has experienced particular difficulties in obtaining planning permission is the provision of a new wastewater treatment works and sludge recycling centre for discharges from Brighton and Hove to satisfy the UWWTD. Ofwat made provision for the delivery of this work in the K4 Period and SWS planned delivery by March 2010. SWS’ original proposal was rejected by the Government in July 2007 following a public inquiry. SWS prepared new proposals which responded to the comments made by two Secretaries of State. The new planning application was received by East Sussex County Council in January 2008. Planning permission was granted on 23 October 2008 and is currently subject to an application for judicial review of the planning decision process. Following a competitive tender process for design and construction of the new treatment plant, award of this contract to 4D is expected to follow immediately on satisfactory conclusion of the judicial review proceedings at a value of £225 million. Prior to the judicial review challenge, commissioning was scheduled for November 2012. On 23 September 2005, the EA issued an enforcement notice under the Water Resources Act 1991 Section 90B (as amended by the Environment Act 1995, Schedule 22 paragraph 142). This required SWS to complete the provision of a new secondary treatment works by 31 March 2010, which is now practicably unachievable due to the delay in the ability to award the contract for design and construction. The EA, in a letter to SWS on 21 September 2007, confirmed that it would review the situation once the planning decision had been made, and extend the deadline of the enforcement notice to an agreed revised date. SWS anticipates that, on satisfactory conclusion of the judicial review proceedings, a completion date that reflects the time required to construct the scheme will be agreed with the Environment Agency. However, if this does not occur, SWS is liable to prosecution leading to fines if it is in breach of the enforcement notice. These fines could be imposed on a daily basis from 1 April 2010 and, if imposed via the Crown Court, would be unlimited.
Asset Condition and Serviceability The Licence requires SWS to produce and provide to Ofwat an Underground Asset Management Plan (the “UAM Plan”) which, among other things, shows the expenditure necessary in each year to ensure that asset condition is maintained in an appropriate state, and tracks the condition of SWS’ assets over time (in practice, Ofwat requires information in respect of both above ground assets and below ground assets).
The latest Ofwat assessment of the performance of SWS’ assets shows “stable” performance for both its underground and above ground water service assets. Sewerage underground asset performance is “marginal” and above ground performance is “stable”. Under the monitoring plan agreed at the 2004 Periodic Review, SWS committed to improve from “deteriorating” serviceability for sewerage above ground assets to “stable” by March 2008. It also committed to maintaining “stable” serviceability for the period 2005-2010 for all other
43
asset categories. SWS has also made provisions in its 2009 Periodic Review investment plan which aim to maintain “stable” serviceability during the period 2010-2015.
Business Process Outsourcing As part of its drive for greater efficiency, SWS has set up outsourcing framework agreements for back-office processing work to leading organisations with offshore capabilities in India (the current annual value of such business process outsourcing is approximately £14 million). Wipro, Tata Consultancy Services, RR Donnelly and Atkins are engaged until at least 2010 to provide a range of services including accounting, customer correspondence, data & reporting, and asset management.
Information Technology Over the period from 1997 to 2008, SWS replaced its mainframe information technology systems. This includes SWS’ business critical billing and customer management system which was replaced by a SAP solution (the “SAP Industry Specific – Utilities Solution”) in 2007.
SWS continues to invest further in new, integrated front and back office solutions to continue the enhancement of business process support and data management. Infrastructure upgrades are in progress to provide an enhanced communications backbone to support flexible working practices such as field data capture and business process outsourcing.
SWS is implementing an Enterprise Resource Planning Business Application Suite (“BAS”), a business transformation project that will involve the introduction of transparent, robust and best practice procedures across the business. In particular, processes governing Finance, Human Resources and Procurement, together with the management of its property portfolio, will be improved. As part of this business transformation project, SWS is using Wipro Technologies who are utilising both onshore and offshore resources to deliver a number of SAP modules in support of the new procedures. The project is planned for implementation in April 2009.
A number of SWS’ information technology services are currently provided under contract by a mix of onshore and offshore service providers. Services include network, infrastructure, service desk, desktop and application support and project delivery management.
Property
SWS’ property interests consist substantially of freehold interests, and there are estimated to be between 3,000 and 4,000 separate titles (excluding pipeline interests). As a result of the reorganisations of local government and water-related services in 1974 and privatisation of the water industry in 1989, SWS inherited many of its sites, and for some, it is unable to deduce full legal title to all of its real property. Those properties where this is true fall into the following broad categories:
• properties in respect of which SWS is believed to have legal title but does not possess full documentary evidence to prove such title (the deeds having been lost or destroyed or never provided by the previous title holder); and/or
• properties in respect of which SWS has acquired or could acquire the necessary rights by compulsory purchase, or claim prescriptive rights or adverse possession.
SWS is not involved in any ongoing disputes, in relation to title to property, of a material nature. SWS has a programme of first registration at HM Land Registry of its current unregistered titles over the next two years.
Insurance SWS maintains insurance cover which it believes is consistent with the generally accepted practices of prudent water and sewerage undertakers, including insurance policies against property damage and business interruption, employer’s liability, public liability and directors’ and officers’ liability.
44
Litigation/Actions In common with other companies in the water and wastewater industry, SWS is frequently involved in, or is the subject of, civil and criminal proceedings, but, save as disclosed herein, SWS is not, and has not been, involved in any governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which SWS is aware) during the 12 months preceding the date of this Prospectus which may have or have had in the recent past significant effects on the financial position or profitability of SWS.
In October 2005, SWS reported to its regulator Ofwat and to the Serious Fraud Office inconsistencies it had found between its reported and actual performance of general levels of service requirements (in relation to the handling of customer complaints) under previous management. SWS and Ofwat jointly instructed KPMG LLP to investigate the irregularities. The Serious Fraud Office launched a criminal investigation into the matter in July 2006. However it decided not to take its investigation further in April 2007. SWS gave an undertaking to Ofwat that it would pay in full any amounts found to be due to identified customers and if the irregularities brought to light by the investigations revealed that SWS benefited in terms of its price reviews to the detriment of its customers, it would fully adjust future prices. In fulfilment of this undertaking SWS repaid in the region of £500,000 in 2006-07 to individual customers found to be have been due a payment under the Guaranteed Service Standards Regulations (the “GSS Regulations”). SWS also agreed not to take up the full amount of its K factor in the three years from 2007-08 to 2009-10. The total amount of K not taken up is equivalent to £19.5 million.
On 31 March 2006, Ofwat published a press notice and served notice on SWS under section 22A(4) of the WIA (the “31 March 2006 Notice”) of its intention to impose a penalty on SWS. The 31 March 2006 Notice stated that “the proposal to impose a penalty is in respect of Southern Water’s failure to achieve standards of performance prescribed under sections 38(2) and 95(2) WIA, namely the GSS Regulations, at all material times between 1 April 2005 (the date on which the Director’s power to impose a penalty commenced and from which the Director’s power to impose a penalty may be exercised) and the date of this notice”. For the purposes of the 31 March 2006 Notice only, the amount of the penalty to be imposed was the nominal amount of £1. On 13 November 2007, Ofwat published a notice under section 22A(5) of the WIA of proposed variation of its proposal to impose a penalty on SWS in relation to the GSS Regulations as published in 1989 (and as amended) (the “13 November 2007 Notice”). The amount of the penalty, as varied, which Ofwat proposed to impose under the 13 November 2007 Notice was £470,000, which amounted to 0.1 per cent. of SWS’ applicable turnover. On 7 February 2008, having considered all representations in response to the 13 November 2007 Notice, Ofwat served notice on SWS under section 22(A)6 of the WIA stating that it would be appropriate to impose a penalty on SWS in respect of its failure to meet standards of performance prescribed under the GSS Regulations. The amount of the penalty imposed was £470,000 representing approximately 0.1 per cent. of SWS’ turnover in the year of 2004-05. The penalty was paid by SWS in April 2008.
On 7 June 2006, Ofwat served notice on SWS under section 203(2) of the WIA requiring SWS to produce documents and furnish information in relation to its misreporting of information to Ofwat in its June returns and at other times, in particular information in relation to customer services. The notice stated that “Ofwat wishes to preserve its ability to impose a penalty on Southern Water in relation to any contravention of Conditions J and/or M of Southern Water’s appointment by Southern Water by reason of misreporting information to Ofwat in its June return submitted to Ofwat on 10 June 2005 and in information provided to Ofwat at other times subsequently. In addition to requesting information and documents, serving this notice now allows Ofwat to preserve its ability to impose a penalty on Southern Water in relation to such contraventions which occurred in the 12 months prior to the date of this notice”. On 13 November 2007 Ofwat published a notice under section 22A(4) of the WIA of a proposal to impose a penalty on SWS in respect of SWS having contravened regulatory reporting requirements set out in Condition J and/or Condition M of its Instrument of Appointment as a water and sewerage undertaker. The notice stated, “Ofwat has
45
considered the facts, matters and circumstances relating to the contraventions which it appeared to Ofwat at the time of serving the Section 203 Notice (on 8 June 2006) on SWS may have occurred, or may have been continuing to occur. These include the response of SWS to the Section 203 Notice, as well as relevant submissions made by SWS. Ofwat is satisfied that SWS contravened Condition J and/or Condition M or its Instrument of Appointment, when it furnished information concerning the years 1997-98, 2002-03, 2003-04 and 2004-05 on 10 June 2005. Ofwat is of the opinion that it would, in all the circumstances, be appropriate to impose a penalty on SWS in respect of such contraventions”. The amount of the proposed penalty under the Notice was £19.8 million, which represents 3.5 per cent. of SWS’ turnover in 2006-07. On 7 February 2008, Ofwat published a notice under Section 22(A)6 of the WIA of its imposition of a penalty of £19.8 million on SWS, in relation to contraventions of Condition J and/or M of its appointment. The penalty was paid by SWS in April 2008.
2009 Periodic Review Every five years the WSRA sets limits on the prices the water companies can charge their customers. In November 2009 the WSRA will set price limits for customers’ bills for each year between 2010 and 2015. SWS consulted customers on its strategic plans for the next 25 years in its Strategic Direction Statement (“SDS”) in November 2007. In August 2008 it submitted its Draft Business Plan (“DBP”) to the WSRA, based on the SDS. The DBP sets out SWS’ initial views of what it plans to deliver and how much this will cost. Its key objectives are to provide value to customers, deliver resilient services and enable sustainable growth.
The DBP provided a detailed assessment of what SWS plans to do to maintain and, where supported, enhance services and deliver improvements in the period 2010 to 2015, including:
• enhancing its asset base to ensure resilient services;
• delivering the portfolio of environmental improvement schemes required by European legislation;
• providing new infrastructure to allow sustainable growth in the South and South East of England;
• delivering full metering to enable customers to control their bills;
• reducing the number of properties at risk of flooding;
• ensuring that when customers contact SWS it resolves queries as soon as practicable;
• further improving the quality of drinking water;
• increasing mains replacement rates and reduce leakage levels;
• developing additional water resources in the more water-stressed areas;
• reducing pollution events and sustain improvement to wastewater treatment works consent compliance; and
• implementing cost beneficial schemes to reduce energy consumption and carbon footprint.
The draft investment plan amounts to £2,742 million at 2007/08 prices but, SWS indicated in the DBP that it would be aiming to increase efficiency to deliver this DBP for no more than £2,570 million.
On 23 December 2008, Ofwat published its preliminary view of capital expenditure needs for the AMP5 Period (its "draft baseline"), based on the evidence available from draft business plans of water companies and cost base submissions as well as feedback from key stakeholders: see Ofwat, Capital expenditure for 2010-15: Ofwat’s view on companies’ draft business plan (23 December 2008). Water companies are expected to consider Ofwat's draft baseline view in putting together their final business plan proposals and expenditure forecasts. The draft baseline view for SWS, as informed by Ofwat to SWS, for the AMP5 Period is £1,601 million. Ofwat will take account of new evidence when it resets its final baseline view (in its final
46
determination to be issued in 2009) in the light of the further information to be submitted with water companies' final business plans, due to be submitted in April 2009.
SWS is reviewing with Ofwat the scope of the draft investment plan in advance of the Final Business Plan. SWS will submit its final business plans to the WSRA in April 2009, which will publish its draft determination of price limits in July 2009. Following a period of consultation with companies and stakeholders the WSRA will publish its final determination of price limits in November 2009. SWS will have to decide whether to accept the price limits set or to seek referral to the Competition Commission. The new price limits will come into effect on 1 April 2010.
Non-regulated Activities SWS’ non-regulated businesses are not material to the group, generating approximately £8.8 million annual turnover and £4.1 million operating profit (4 per cent. of the total) for the year ending 31 March 2008. In addition, SWS has a residual non-core property portfolio that is being realised over time (£9.5 million profit on disposals of fixed assets for year ending 31 March 2008).
Activity Revenue Operating Profit
Scientific services 0.5 0.1 Land searches 3.7 2.4 Other 4.6 1.6 Total 8.8 4.1
Ring Fencing and the SWS Financing Group
As part of its obligations as a Regulated Company, SWS is subject to certain ring-fencing restrictions under its current Licence. On 7 March 2008, Ofwat launched a public consultation into the regulatory issues arising from the change of ownership of SWS: see “The completed acquisition of Southern Water Services Limited by the Greensands Consortium: a Consultation Paper by Ofwat” (the “Consultation Paper”). The Consultation Paper sets out Ofwat’s intention to strengthen regulatory ring-fencing for SWS through the incorporation into the Licence of some additional conditions. See the section “Regulatory Ring-fencing” below, which sets out the current Licence provisions including the additional conditions which came into effect on 5 August 2008.
In addition, to reduce SWS’ exposure to credit and event risk of companies in the Greensands Group, a “ring- fenced” financing group has been created (the “SWS Financing Group”). These measures also reflect the requirements of the covenant and security package as summarised in Chapter 7 “Overview of the Financing Agreements”.
The ring-fencing measures are intended to ensure (i) that SWS has the means to conduct its Appointed Business separately from the Greensands Group, and (ii) that all dealings between the Greensands Group and the SWS Financing Group are on an arm’s length basis. The ownership structure of the SWS Financing Group is set out in Chapter 3 “Summary Financing Structure”.
The main elements comprising the regulatory and structural ring-fencing of the SWS Financing Group from the Greensands Group companies are set out below.
Regulatory Ring-fencing
Regulatory ring-fencing is common, in differing degrees, to each of the Regulated Companies in England and Wales pursuant to their respective licences. Under the Licence, SWS must ensure that transactions between it and its associated companies are on an arm’s length basis, to prevent cross-subsidisation of activities. Failure to comply with the Licence may in certain circumstances give rise to a breach of the Licence and possibly the
47
Competition Act 1998 as described in Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales”. Under Licence Condition K.3.1, SWS must ensure at all times, so far as reasonably practicable, that, if a Special Administration Order was made in respect of it, SWS would have available to it sufficient rights and assets (other than financial resources) to enable the Special Administrator to manage its affairs, business and property so that the purposes of such order could be achieved. See Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales” under “Licences - Special Administration Orders”.
Current ring-fencing provisions in SWS’ Licence
The ring-fencing provisions contained in SWS’ Licence are broadly similar to those contained in the licences of all other Regulated Companies. The most important provisions are:
(a) Transactions between SWS and its associated companies: Any transaction between SWS and its associated companies (being its subsidiaries and any affiliated companies) must be conducted at arm’s length, such that there is no cross-subsidy of the associated company by SWS (or vice versa).
(b) Restrictions on Dividend Payments: SWS is required to only pay dividends in accordance with a policy that complies with the following principles: (i) such payments will not impair the ability to finance its Appointed Business; and (ii) the payment of such dividends is to reward efficiency and the management of economic risk.
(c) Limits on the transfer of certain assets to associated companies: Save with the express consent of Ofwat, SWS is not permitted to transfer certain rights or assets (being those which a Special Administrator would require if a Special Administration Order were made in order to operate the Appointed Business) to an associated company.
(d) Adequate Resources: SWS is required at all times to act in a manner “best calculated” to ensure that it has adequate financial resources and facilities and also management resources to carry out its Regulated Activities (“Regulated Activities” being the functions of a water undertaker or, as the case may be, a sewerage undertaker) (including necessary investment programmes). The directors of SWS are required to certify on an annual basis that this requirement will continue to be met for the subsequent 12 month period. The basis on which such a view is formed must also be disclosed to Ofwat. As soon as the directors become aware of a reason why SWS cannot be expected to comply with this obligation, they are obliged to file a report to this effect to Ofwat in accordance with the provisions of the Licence.
(e) Restrictions on other transactions: Save with the express consent of Ofwat, SWS must not (i) give any guarantee of any liability of any associated company, (ii) make to any associated company a loan, or (iii) enter into an agreement or incur a commitment incorporating a cross default obligation (whether with an associated company or otherwise). Condition F.6.11(1B) sets out a limited exception as regards situations where liability under a cross-default obligation would arise only on a default of a subsidiary company of SWS, in which case SWS may permit that cross-default obligation to remain in effect for the period for which it was fixed by the instrument which created it, so long as its potential liability is not changed.
(f) Publishing of financial information: SWS is required to publish such information about its annual and interim financial results as is required by the UKLA listing rules as if SWS were listed on the London Stock Exchange.
(g) Maintenance of a financial instrument listed on the London Stock Exchange: SWS is required to maintain a financial instrument and shall use all reasonable endeavours to retain its listing on the London Stock Exchange.
48
(h) Investment grade credit rating: SWS (or any associated company) will be required to maintain an investment grade issuer credit rating. The issuer rating will reflect the financial capacity of the Appointed Business and therefore its ability to raise capital or maintain access to liquidity in the future. Any significant adverse changes to the rating will act as an early signal that the ability of the Appointed Business to raise future finance is at risk.
(i) Conducting the Appointed Business of SWS: SWS (and its directors) is required to operate the Appointed Business as though it were substantially SWS’ sole business and SWS was a separate public limited company. In particular, SWS should:
(a) have a board of directors which will act independently of the parent company/controlling shareholders and exclusively in the interests of SWS;
(b) ensure that all directors disclose any conflicts of interest both to SWS and Ofwat, and that SWS’ articles of association prohibit a director from voting in any matter in which they have an interest;
(c) ensure that, where a potential conflict between SWS and its corporate group arises, SWS and its board of directors have exclusive regard to SWS’ interests as a regulated water and sewerage undertaker;
(d) notify Ofwat of all changes in board membership and responsibilities/functions of the directors;
(e) have regard to the Principles of Good Governance and Code of Best Practice required by the UKLA listing rules from time to time; and
(f) have regard to, when conducting the Appointed Business, the dividend policy to be adopted by the board of directors.
Recent modifications to SWS’ Licence
In addition to the above conditions, the Consultation Paper proposed that certain conditions be incorporated into SWS’ Licence. On 5 August 2008, Ofwat modified SWS’ Licence Condition F. The amended Condition F came into effect on 5 August 2008, with the introduction of, among others, the following conditions:
(a) Adequate systems of planning and internal controls: SWS must, at all times, act in a manner best calculated to ensure that it has adequate systems of planning and internal control to enable it to secure the carrying out of the Appointed Business. Such systems of planning and internal control are to comply with such guidance as Ofwat may specify from time to time. Further, the modified Licence Condition F also provides that compliance with the requirement for adequate resources, systems of planning and internal control, must not be dependent on the discharge by any other person of any obligation under, or arising from, any agreement or arrangement under which that other person has agreed to provide any services to SWS in its capacity as a Regulated Company. As SWS is required to do in relation to its financial and management resources, SWS’ directors will be required to certify to Ofwat on an annual basis that this new requirement will continue to be met for the subsequent 12 month period.
(b) Cash lock-up: A cash lock-up provision was introduced into Licence Condition F which prohibits, subject to certain limited exceptions, save with the express consent of Ofwat, the transfer, lease, licence or loan of any sum of cash or other assets to an associated company when SWS (i) no longer holds an investment grade rating, or (ii) holds a rating at the minimum investment grade level and that rating has been put under review for possible downgrade or is assigned a negative outlook.
The Consultation Paper also set out Ofwat’s intention to modify Licence Condition P which relates to undertakings by parent companies. The amended Licence Condition P (which also came into effect on 5
49
August 2008) requires that SWS secures legally enforceable undertakings from its Ultimate Controller (as defined below) and, when such Ultimate Controller is not a UK holding company, from its UK holding company, that it (and each of its subsidiaries, other than SWS and SWS’ subsidiaries) will:
(a) give SWS all such information as may be necessary to enable SWS to comply with the Licence;
(b) refrain from any action which might cause SWS to breach any of its obligations under the WIA or the Licence; and
(c) ensure that the board of directors of SWS contains not less than three independent non-executive directors, who must be persons of standing with relevant experience and who collectively have connections with and knowledge of the areas within which SWS provides water and sewerage services and an understanding of the interests of the customers of SWS and how these can be respected and protected.
SWS must inform Ofwat immediately in writing if it becomes aware that the undertakings have ceased to be legally enforceable, or that there has been any breach of their terms. Further, save with the written consent of Ofwat, SWS must not enter (directly or indirectly) into any contract or arrangement with its Ultimate Controller or any associated company (other than subsidiaries of SWS) at a time when no such undertaking exists or there is an unremedied breach of such undertaking.
For the purposes of the amended Condition P, “Ultimate Controller” means any person (including, without limitation, a corporate body) who or which (alone or jointly with others and whether directly or indirectly) is (in the reasonable opinion of Ofwat) in a position to control, or to exercise material influence over, the policy or affairs of the Appointed Business or of any holding company of the Appointed Business.
In the Consultation Paper, Ofwat saw no reason to challenge the proposals from the Greensands Companies and SWS that Greensands Europe Limited, as the ultimate UK holding company of SWS, IIF International SW UK ParentCo Ltd and Challenger Southern Water Ltd should provide the Condition P undertakings, and the Condition P undertakings have been provided. The position is under discussion with Ofwat following the recent sale by Challenger Southern Water Ltd of a third of its previous holding.
Structural Ring-fencing
The regulatory ring-fencing measures described above have been enhanced by the separation of SWS from non-regulated companies and the establishment of the SWS Financing Group, as described in Chapter 3 “Summary Financing Structure”. The composition of each of the boards of directors for the companies within the SWS Financing Group is described below. SWS must comply with the current Licence provisions regarding the composition of the board of SWS (the “Board”, the members of which are described in “Management and Employees of SWS” below) while the Consultation Paper sets out additional requirements regarding the board of directors of SWS which are to be implemented by SWS (as further described above). The remainder of the boards of directors of each company in the SWS Financing Group may comprise directors who are also directors of other associated companies outside the SWS Financing Group.
Security and Covenant Packages
In connection with the Programme, the SWS Financing Group is to provide as full a security package as is commensurate with the limitations imposed by the WIA and the Licence.
Pursuant to the covenant package (as set out in Chapter 7 “Overview of the Financing Agreements”), dividends, management fees (if any), debt service relating to and repayments under certain intra-group debt, and other such distributions are only permitted if no Trigger Event or Event of Default is continuing and historical and forward looking interest cover ratios and regulated asset ratios and certain other conditions are
50
met. The security package and the covenant-based ring-fencing restrictions placed on the SWS Financing Group are set out in Chapter 7 “Overview of the Financing Agreements”.
Business Separation
All new debt relating to the Appointed Business will be issued by entities within the SWS Financing Group.
Pursuant to the ring-fencing arrangements, SWS employs all employees required to run the Appointed Business.
All transactions entered into by the SWS Financing Group with third parties (including Greensands Companies) are entered into on an arm’s length basis. Any transaction between SWS and the Greensands Companies is formally reviewed to ensure compliance with the Licence and procurement regulations. In addition, SWS is required to comply with additional requirements that Ofwat introduced into the Licence on 5 August 2008 regarding systems of planning and internal control. See the section “Regulatory Ring-fencing” above.
As part of the ring-fencing arrangements, SWS must conduct the Appointed Business as if it were substantially SWS’ sole business. SWS’ management has retained some Permitted Non-Appointed Business and assets within permitted de minimis levels. Under the covenant package, the Security Trustee may permit SWS to enter into limited joint ventures in areas outside the regulated water and wastewater business subject to certain limitations on the aggregate value of all Permitted Non-Appointed Business. See Chapter 7 “Overview of the Financing Agreements”.
Under the covenant package, SWS is able to acquire assets or make disposals only if conditions relating to each are met (for example, regulated asset ratio requirements in relation to disposals). See Chapter 7 “Overview of the Financing Agreements” under “Common Terms Agreement – Covenants – General Covenants”.
Management and Employees of SWS
Directors and Secretary of SWS The SWS board consists of nine individuals.
Save as disclosed in relation to Mike Welton, Les Dawson OBE, Howard Goodbourn, Jason Zibarras, Philip Peters and Steven Marshall below, no director has any actual or potential conflict of interest between his duties to SWS and his private interests or other duties.
The directors and secretary of SWS are set out below, each of whose business address is Southern House, Yeoman Road, Worthing, West Sussex BN13 3NX.
Mike Welton - Chairman Mike Welton was appointed non-executive Chairman in January 2008. He is a chartered civil engineer and a Fellow of the Royal Academy of Engineering and the Institution of Civil Engineers, was previously Chairman of construction materials group Hanson plc, and is the current Chairman of support services provider Global Solutions Ltd. He is a former Chief Executive of the international engineering, construction and services group Balfour Beatty plc and also a past Chairman of both the Turkish/British Business Council and the Government’s Railway Sector Advisory Group. He currently sits on the advisory board of Montrose Associates. He is also a non-executive director of Morrison Utility Services which provides Mechanical and Engineering Services to SWS throughout its region. Morrison Utility Services’ interests may overlap with those of SWS. He is also Chairman of Greensands Holdings, which may have overlapping interests with those of SWS.
51
Les Dawson OBE - Chief Executive Officer Les Dawson was appointed Chief Executive Officer and a director of SWS in October 2005. He had previously been closely involved with SWS as a consultant since September 2004 advising on procurement and organisational structure and change. From 2000 to 2003 he was Managing Director, Service Delivery, and a main board director with the United Utilities PLC group of companies. He is a chartered gas and electrical engineer, as well as a water engineer, with 27 years’ experience in utilities. He is a board member of the South East England Development Agency. He is also a director of SWI, the Issuer, SWSG, SWSGH, SWSH and other subsidiary companies of SWI. The interests of SWI, the Issuer, SWSG, SWSGH, SWSH and other subsidiary companies of SWI may overlap with those of SWS. He was awarded an OBE for services to the energy and water industries in 2009.
Howard Goodbourn - Finance Director Howard Goodbourn was appointed Finance Director of SWS in March 2004. He has spent a large part of his career in the utility sector in various finance roles, and was Treasurer and divisional Finance Director with Powergen UK plc. He spent the early part of his career in corporate finance with Charterhouse Bank, having qualified as a chartered accountant with Deloitte. He is also a director of SWI, the Issuer, the Pension Companies, SWSG, SWSGH, SWSH and other subsidiary companies of SWI. The interests of SWI, the Issuer, the Pension Companies, SWSG, SWSGH, SWSH and other subsidiary companies of SWI may overlap with those of SWS.
In addition, there are six non-executive directors:
Jason Zibarras - Non-executive Director Jason Zibarras was appointed a director of SWS in October 2007 and is currently Chairman of the Audit and Risk Review Committee. He is a member of JP Morgan Asset Management’s Infrastructure Investments Group, with responsibility for the Group’s European investment activities. He is also a director of the Greensands Companies and SWC. The Greensands Companies and SWC may have overlapping interests with those of SWS.
Philip Peters – Non-executive Director Philip Peters was appointed a director of SWS in October 2007. He is an Executive Director with the Challenger Group in London with overall responsibility for Challenger’s European infrastructure business. He is also a non-executive director of Inexus Group companies. He has spent the majority of his career in investment banking, previously with Macquarie Bank and Citibank. He is also a director of the Greensands Companies and SWC. The Greensands Companies and SWC may have overlapping interests with those of SWS.
David Golden – Independent Non-executive Director David Golden was appointed a director of SWS in November 2003. He heads the MPSL Group of companies and is a director of Payzone plc. He was previously Contracts Director at British Nuclear Fuels plc and Director of Purchasing at North West Water Limited.
Steven Marshall – Independent Non-executive Director Steven Marshall was appointed a director of SWS in April 2005. He is Chairman of Balfour Beatty plc and Chairman of Delta plc. Balfour Beatty plc is as the date of this Prospectus in competition for a significant contract award from SWS. The interests of Balfour Beatty plc may overlap with those of SWS. He was previously Chairman of Queens Moat Houses plc and group chief executive of Railtrack Group plc.
Robert Armstrong OBE – Independent Non-executive Director Robert Armstrong was previously Managing Director of United Utilities Customer Sales and a Director of United Utilities Water plc. He is a former chairman of Water UK and is currently a director of several utility pension companies. He was awarded the OBE for services to the water industry in 2006.
52
Cheryl Black – Independent Non-executive Director Cheryl Black joined O2 in November 2006 as Customer Service Director on the O2 UK Board. She has previously held Customer Service Director roles at Scottish Water and NTL, as well as a range of senior customer focussed positions at Orange, Cable & Wireless and EDF. She also holds a non-executive role on the Board of NHS 24, a telephone-based branch of the NHS, as well as being a Vice President and Companion Member of the Institute of Customer Service and a Director of O2 Pension Trustee Ltd.
Kevin Hall – Company Secretary Kevin Hall is company secretary of SWS. He has worked for SWS for the past 33 years, and is also company secretary of each other member of the SWS Financing Group, the Pension Companies, the Greensands Companies, SWC, SWI, SWSG and other subsidiary companies of SWI.
Pensions Pensions for SWS employees are currently provided through two occupational pension schemes. As at 31 March 2008 there were approximately 338 SWS employees who are not members of an occupational pension scheme. Employees on fixed term contracts are offered access to the CSP (as defined below).
The two pension schemes which operate for SWS employees are the Southern Water Pension Scheme (“SWPS”) and a Company Stakeholder Plan (“CSP”). As at 31 March 2008, there were 1,144 active, 1,818 deferred and 1,635 pensioner members of SWPS and 78 members of the CSP. SWPS is a funded defined benefit arrangement. CSP is a defined contribution scheme.
Pensions management services and secretarial support are currently provided by Capita Hartshead for the SWPS and by Standard Life for the CSP.
The funding level of the SWPS is a net FRS 17 deficit of £81.0 million before deferred tax and £58.3 million after deferred tax as at 31 March 2008. The deficit has arisen mainly as a result of such factors as turbulence in the stock market, low interest rates and reduced actuarial mortality rates.
The SWPS closed to new members from 1 April 2005. SWS has made a commitment to continue the SWPS for existing members until 2010 and to increase the company’s contributions until 2018 to protect the finances of the scheme. Certain terms of the schemes were changed from July 2005 when members were given the option to contribute an extra 3 per cent. of salary to continue at existing accrual rates. They were also given the option to continue to pay the current contribution rate but build up benefits at a lower rate. Other minor changes to the SWPS were made because of legislative changes under the 2004 Finance Act.
Ofwat has indicated a general willingness subject to certain conditions to take into account increases in pension contributions as allowable operating expenditure when determining K for Regulated Companies. Ofwat recognised the need in the 2004 Periodic Review to provide for increased employer pension contributions. In the case of SWS, the allowance is £11.6 million per year which is significantly in excess of the allowances permitted by the 1999 Periodic Review. SWS and the SWPS trustees agreed a schedule of deficit contributions during 2005-2010 which is consistent with this annual allowance. A further schedule of deficit contributions has been agreed by trustees based on the triennial valuation as at 31 March 2007. This revised schedule of deficit contributions commences from 1 April 2010 and amounts to £16.0 million per annum. There is no assurance that Ofwat will take a similar approach in the 2009 Periodic Review.
SWSGH SWSGH is incorporated under the Companies Act 1985 and registered in England and Wales. The registered office of SWSGH is Southern House, Yeoman Road, Worthing, West Sussex, BN13 3NX. SWSGH is a wholly-owned direct subsidiary of SWSG and its authorised share capital is £101,000 divided into 101,000 ordinary shares. 100,100 ordinary shares have been issued of which all have been fully paid up. SWSGH’s subsidiaries are SWSH, SWS, the Issuer, SWEPST and SWPT.
53
Directors and Company Secretary The directors and company secretary of SWSGH are set out below, each of whose business address is Southern House, Yeoman Road, Worthing, West Sussex, BN13 3NX.
The Directors of SWSGH are Howard Goodbourn and Les Dawson OBE. Descriptions of their principal activities outside the SWS Financing Group can be found above under “Management and Employees of SWS – Directors and Secretary of SWS”.
Save as disclosed above under “Management and Employees of SWS – Directors and Secretary of SWS” in relation to Howard Goodbourn and Les Dawson OBE, no director has any actual or potential conflict of interest between his duties to SWSGH and his private interests or other duties.
Kevin Hall is company secretary of SWSGH.
SWSH SWSH is incorporated under the Companies Act 1985 and registered in England and Wales. The registered office of SWSH is Southern House, Yeoman Road, Worthing, West Sussex, BN13 3NX. SWSH is a wholly- owned direct subsidiary of SWSGH and its authorised share capital is £101,000 divided into 101,000 ordinary shares. 100,100 ordinary shares have been issued of which all have been fully paid up. SWSH’s subsidiaries are SWS, the Issuer, SWEPST and SWPT.
Directors and Company Secretary The directors and company secretary of SWSH are set out below, each of whose business address is Southern House, Yeoman Road, Worthing, West Sussex, BN13 3NX.
The Directors of SWSH are Howard Goodbourn and Les Dawson OBE. Descriptions of their principal activities outside the SWS Financing Group can be found above under “Management and Employees of SWS – Directors and Secretary of SWS”.
Save as disclosed above under “Management and Employees of SWS – Directors and Secretary of SWS” in relation to Howard Goodbourn and Les Dawson OBE, no director has any actual or potential conflict of interest between his duties to SWSH and his private interests or other duties.
Kevin Hall is company secretary of SWSH.
The Issuer
The Issuer is incorporated and registered in the Cayman Islands. The registered office of the Issuer is c/o Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands. The Issuer is a wholly-owned direct subsidiary of SWS and has no subsidiaries. The authorised share capital is £25,000 divided into 25,000 ordinary shares of £1 each, of which 1,000 such shares are in issue and are fully paid up.
Directors and Company Secretary
The directors and company secretary of the Issuer are set out below, each of whose business address is Southern House, Yeoman Road, Worthing, West Sussex BN13 3NX.
The Directors of the Issuer are Les Dawson OBE and Howard Goodbourn. Descriptions of their principal activities outside the SWS Financing Group can be found above under “Management and Employees of SWS — Directors and Secretary of SWS”.
Save as disclosed above under “Management and Employees of SWS – Directors and Secretary of SWS” in relation to Howard Goodbourn and Les Dawson OBE, no director has any actual or potential conflict of interest between his duties to the Issuer and his private interests or other duties.
Kevin Hall is the company secretary of the Issuer.
54
CHAPTER 5 RISK FACTORS
The following sets out certain aspects of the Programme documentation and the activities of the SWS Financing Group about which prospective Bondholders should be aware. The occurrence of any of the events described below could have a material adverse impact on the business, financial condition or results of operations of the Issuer, SWS or the other Obligors and could lead to, among other things:
(a) an SWS Event of Default;
(b) an Event of Default under the terms and conditions of the Bonds;
(c) non-payment of scheduled principal and/or interest in respect of the Class A Wrapped Bonds or Class B Wrapped Bonds (if, additionally, the relevant Financial Guarantor were to default on its obligations under any Financial Guarantee);
(d) non-payment of unguaranteed amounts under the Class A Wrapped Bonds or Class B Wrapped Bonds; and
(e) non-payment of amounts in respect of the Class A Unwrapped Bonds or the Class B Unwrapped Bonds.
Prospective Bondholders should note that the risks described below are not the only risks that the Issuer, SWS or the other Obligors face. The Issuer, SWS or the other Obligors have described only those risks relating to their operations and the Bonds that they consider to be material. There may be additional risks that the Issuer, SWS or the other Obligors currently consider not to be material or of which they are not currently aware, and any of these risks could have the effects set forth above. The following is not intended to be exhaustive and prospective Bondholders should read the detailed information set out elsewhere in this document prior to making any investment decision. Further, any prospective Bondholder should take their own legal, financial, accounting, tax and other relevant advice as to the structure and viability of its investment. Bondholders may lose the value of their entire investment in certain circumstances. If the Issuer has insufficient funds, the Bonds may not be repaid in full on their respective maturity dates.
In addition, while the various structural elements described in this document are intended to lessen some of these risks for holders of the Bonds, there can be no assurance that these measures will ensure that the holders of the Bonds of any Sub-Class receive payment of interest or repayment of principal from the Issuer in respect of such Bonds, or from a Financial Guarantor in respect of the Class A Wrapped Bonds or Class B Wrapped Bonds, on a timely basis or at all.
Regulatory and Competition Considerations The water industry is subject to extensive legal and regulatory obligations and controls, and SWS must comply with all applicable laws, regulations and regulatory standards (see Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales”). The application of these laws, regulations and standards and the policies of Ofwat could have a material adverse effect on the business, financial condition or results of operations of SWS.
In this context, in particular, potential investors should be aware of the following:
Licence Under the WIA, the conditions of the Licence may be modified by Ofwat with the consent of SWS or without SWS’ consent following a reference to the Competition Commission where the Competition Commission concludes that there are effects adverse to the public interest which can be remedied or prevented by modifications. Modifications could also result from a decision on a merger or market investigation reference by the Competition Commission. In addition, the Secretary of State has a power to veto certain proposed
55
modifications agreed by Ofwat and SWS. Other proposed modifications agreed by Ofwat and SWS may be vetoed if it appears to the Secretary of State that the modifications should only be made, if at all, after a reference to the Competition Commission. Finally, primary legislation can create powers for the making of modifications by Ofwat without the consent of Regulated Companies. The Water Act provided Ofwat with powers to make unilateral modifications, following consultation with Regulated Companies, to give effect to arrangements for water supply licensing (“WSL”) and to provide for the payment of fees to cover the expenses of the new Consumer Council for Water, but the period within which these powers could be exercised has expired (see also Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales” under “Modification of a Licence”).
Any restrictive modification to the conditions of the Licence could have a material adverse impact on SWS.
A failure by SWS to comply with the conditions of the Licence or certain statutory duties, as modified from time to time, may lead to the making of an enforcement order by Ofwat or the Secretary of State which could have an adverse impact on SWS. Failure by it to comply with any enforcement order (as well as certain other defaults) may lead to the making of a Special Administration Order (as defined below). See Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales” under “Special Administration Orders”.
The area of appointment of SWS can also be varied in accordance with an inset appointment (see Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales” under “Termination of a Licence”).
Termination of the Licence Under the terms of the Licence, SWS’ appointment may be terminated following the giving of notice by the Secretary of State of at least 25 years. The Licence may also be transferred from SWS at any time following the making of a Special Administration Order. The termination, non-renewal or transfer of the Licence could have a material adverse impact on SWS and, consequently, on the Issuer’s ability to meet its obligations (including the payment of principal and interest) under the Bonds.
If the Secretary of State or Ofwat were to make an appointment or variation replacing SWS as the regulated water and sewerage undertaker for its currently appointed area, they would have a duty to ensure (so far as consistent with their other duties under the WIA) that the interests of SWS’ creditors were not unfairly prejudiced by the terms on which the successor Regulated Company (or Companies) replacing SWS could accept transfers of property, rights and liabilities from SWS.
Thus far there is no precedent to indicate how compulsory licence terminations or Special Administration Orders would work in practice for Regulated Companies with water licence customers and with activities regulated by the WSL regime, nor is there any precedent for such Regulated Companies to indicate the extent to which creditors’ interests would be protected (see paragraphs on “Security” and “Special Administration” below).
Competition in the Water Industry Ofwat has taken steps to introduce competition into the water supply market via inset appointments and the WSL regime:
• Inset appointments: Since 1997, Ofwat has granted a number of inset appointments, although prior to 2007, the appointees had all, except one (Albion Water), been existing Regulated Companies. In October 2007, Ofwat granted inset appointments to SSE Water, part of the Scottish and Southern Energy plc group, and has subsequently granted three further inset appointments to Independent Water Networks Limited (“IWNL”). While none of the existing inset appointments affect the Region, SWS has had recent discussions with IWNL regarding IWNL’s intention to apply for inset applications in the Region but has not entered into any agreements with it for the eventuality that IWNL is granted inset appointments in the Region.
56
Currently, the only inset appointment in SWS’ original area of appointment is in respect of Tidworth Army Camp (“Tidworth”), which is on the boundaries of both SWS’ and Wessex Water Services Limited’s areas of appointment. Operation of Tidworth’s water supply and wastewater services, previously undertaken by the Ministry of Defence, was put out to tender in 1996 and the tender was won by Thames Water Utilities Limited.
Albion Water has applied to WSRA to be a sewerage undertaker for a site at Knowle Village, near Fareham, Hampshire. The site is a mixed-use development that, once complete, will consist of approximately 700 residential properties and some commercial properties. The site is at present served by a private sewerage system. Ofwat proposes to appoint Albion Water as the statutory sewerage undertaker for the site subject to the conclusions drawn from a public consultation that closed on 12 December 2008.
• WSL regime: The Water Act amended the WIA and introduced the WSL regime, as described in Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales”. To date, seven companies have been granted water supply licences by Ofwat, although Aquavitae (UK) Limited’s licence was revoked in June 2008 following its administration. As at the date of this Prospectus, SWS has not received any applications from holders of water supply licences to supply to premises within the Region. At present, holders of WSLs are only permitted to supply customers using in excess of 50 megalitres per annum although Ofwat is presently consulting on the reduction of this threshold (which requires legislative change). For the period covered by the 2008 June return, 192 water services customers, generating revenues of £24.602 million and 188 sewerage and trade effluent customers, with revenues of £27.485 million (in aggregate representing approximately 6.5 per cent. of total water revenues as reported in the 2008 June return for the year ended 31 March 2007) fell into this large user category. The ability of SWS’ existing qualifying customers to choose to obtain their water supply from a different supplier could adversely affect SWS’ turnover, which could adversely affect SWS’ business, results of operations, profitability or financial condition.
Ofwat is currently consulting on further measures to increase competition in water and wastewater services (as more fully set out in Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales” under “Competition in the Water Industry”). On 13 July 2007, Ofwat published a consultation paper which set out a number of possible options for developing current regulation, as well as various options for longer term change to the water and wastewater industry (see “Consultation on market competition in the water and wastewater industries in England and Wales”, published 13 July 2007). This was followed in December 2007 by a further consultation document setting out Ofwat’s proposals for introducing further competition in the water and wastewater industries in England and Wales by way of changes to the regulatory regime (see “Market competition in the water and sewerage industries in England and Wales Part I: Water Supply Licensing”, published 20 December 2007). This document also set out industry responses to the longer term changes that it identified in the July 2007 consultation paper. Ofwat published the second part of that report on 16 May 2008 which, among other things, considers these issues in more detail (see “Ofwat’s review of competition in the water and sewerage industries: Part II”). Included in this document is also a recommendation that progressive steps be taken to vertically separate contestable markets from natural monopoly activities in the water and sewerage industries, moving towards separated price controls before Ofwat begins to set price limits for the period after 2015.
In February 2008, DEFRA and HM Treasury commissioned an independent review of competition and innovation in water markets. The review, led by Professor Martin Cave, has been asked to consider the scope to deliver benefits and drive innovation through developing competition and contestability in all aspects of the supply chain in the water and sewerage sector, and to make recommendations to the Government regarding the required changes to legislative and regulatory frameworks. On 18 November 2008 Professor Cave published an interim report for consultation which set out his preliminary recommendations and other areas that need to be further analysed. Those recommendations include the introduction of competition for large
57
non-household users as a first step (by lowering the non-household users threshold to five megalitres first and, on the introduction of a suitable switching mechanism and accompanying changes, possibly, in 2012, further reducing this threshold to one megalitre), vertical legal separation, a reform of retail access prices, a reform of the abstraction licence/discharge consent regimes and possible reforms to the upstream markets with a view to further consideration of the potential to introduce competition. The deadline for submitting responses to the interim report was 9 January 2009 and it is expected that a final report of the review will be published in Spring 2009. On 24 November 2008, the Chancellor of the Exchequer presented the 2008 Pre-Budget Report. The Government has accepted the recommendation in Professor Cave’s interim report that there should be a phased approach to furthering competition, and as a first step has announced a package of measures (in line with those recommendations) to extend and enhance retail competition in the water markets in England for large non-household users. The Government will respond to further recommendations once it receives the final report.
Ofwat has also stated that it will use its powers under the Competition Act, which provides Ofwat and the Office of Fair Trading (“OFT”) with power to investigate and prohibit anti-competitive agreements and conduct relating to the water and wastewater sector (see Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales” under “Competition in the Water Industry”). These powers include the power to impose fines of up to 10 per cent. of SWS worldwide group-wide turnover for the business year preceding the finding of the infringement. Any agreement which infringes the Competition Act may be void and unenforceable. Breaches of the Competition Act may also give rise to claims for damages from third parties.
SWS Revenue and Cost Considerations The net operating revenues generated by SWS from its water and wastewater business may not be sufficient to enable it to make full and timely payment of amounts due to creditors, including under the Issuer/SWS Loan Agreements. This could have a material adverse impact on the Issuer’s ability to meet its obligations (including the payment of principal and interest) under the Bonds. In addition to the regulatory and competition risks described above which could adversely affect the revenues and costs of SWS, other potential events which could result in SWS having insufficient net operating revenues to meet its financing obligations include:
Periodic Review and Interim Determinations The turnover, profitability and cashflow of the Appointed Business is substantially influenced by the service levels, regulatory targets and price limits established every five years by Ofwat in its Periodic Review, and Ofwat’s assessment of delivery against those factors. A more detailed description of the process under which Ofwat determines price limits for SWS is described in Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales”.
Although Ofwat has a duty to act in the manner that it considers best calculated to secure that SWS is able to finance the proper carrying out of its functions, an adverse price determination, which would adversely affect turnover, profitability and cashflow and, consequently, the ability to maintain an investment grade issuer credit rating in accordance with the Licence as described in Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales”, may occur as a result of a number of factors, including an inadequate allowed cost of capital or regulatory assumptions concerning operating expenses and required capital expenditure as well as turnover forecasts proving not to be sufficiently accurate. In addition, unforeseen financial obligations or costs may arise (for example, as a result of ensuring regulatory compliance or changes to legislation or regulatory requirements, some instances of which are provided below) after a Periodic Review which were not taken into account by the DGWS in setting price limits and are consequently not compensated for, which could adversely affect financial performance.
As described in Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales” under “Interim Determinations of K”, an interim determination of price limits (an “IDOK”) may be made between Periodic Reviews in specified circumstances, including, in the cases of SWS and most other Regulated
58
Companies which have the benefit of a Shipwreck Clause in the Licence, the circumstances contemplated by that clause. In contrast to Periodic Reviews, the methodology to be applied for any IDOK is set out in detail in the Licence and the scope for discretion is narrower.
There is, however, no assurance that any IDOK sought by SWS will be made or, if an IDOK or determination pursuant to the provisions of the Shipwreck Clause is made, that any adjustment made pursuant to such an IDOK, or determination pursuant to the Shipwreck Clause, as the case may be, will provide adequate revenue compensation to SWS.
The following are examples of factors which may give rise to unforeseen financial obligations or costs which may not be compensated for under any Periodic Review of IDOK:
Deviations from Ofwat’s projections Under Licence Condition B, which relates to the level of SWS’ charges for the supply of water, the RPI+K price cap limits the annual “weighted average increase” in the standard charges of SWS. This, in turn, is calculated by reference to the “tariff basket formula” (see Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales” under “Price Control”). Historically SWS has borne the risk of revenue loss arising from any deviations during each Periodic Review Period from projections, including demographic changes affecting SWS’ customer base, the loss of a major customer, unexpected reductions in customers or movements in volumes consumed/discharged by customers, and loss of business through inset appointments. For Periodic Review 2009, Ofwat has said it will introduce a revenue correction mechanism, covering the AMP5 Period. Under the mechanism, the revenue requirements for the next review period will be reduced or increased by the amount of any under-recovery or over-recovery of revenues from charges in the tariff basket between 2010 and 2015. It will also include an adjustment so that companies have an incentive to maintain accurate billing records. This incentive would operate principally by increasing or decreasing the revenue correction by an “efficient billing factor” (being the cost that an efficient company incurs in finding and billing an additional property) for every property actually found and billed by the company above or below the number that Ofwat expects. Since actual out-turn revenues are used as the basis for the setting of price limits in the subsequent five-year period, any deviation from revenue projections in the previous five-year period may be reflected in such price limits.
Failure by SWS to meet Ofwat level regulatory outputs or its capital investment programme
The Appointed Business requires significant capital expenditure for additions to, or replacement of, plant and equipment for its water supply and sewerage facilities and networks. The price limits set by Ofwat every five years take into account the level of capital expenditure expected to be incurred during the relevant Periodic Review Period and the associated funding costs and operating costs.
If SWS is unable to deliver its capital investment programme at expected expenditure levels, or is unable to secure the expected level of efficiency savings on its capital investment programme, or the programme falls behind schedule or contains incorrect assumptions by SWS as to the capital investment required, SWS’ profitability might suffer because of a need for increased capital expenditure. Ofwat may also factor such failure into future Periodic Reviews by seeking to recover amounts equivalent to the “allowed costs” of any parts of the programme that are not delivered. SWS’ ability to meet regulatory output targets and environmental performance standards could also be adversely affected by such failure, which may result in fines imposed by Ofwat of an amount up to 10 per cent. of turnover or other sanctions and further increases in capital expenditure and operating expenditure.
Ofwat asset serviceability Ofwat published its latest assessment of SWS’ water and sewerage infrastructure and non-infrastructure serviceability in August 2008. On three classes, SWS is now rated as “Stable” and “Marginal” on the fourth for sewerage infrastructure. Failure to deliver “stable” serviceability in the future could lead to an adverse
59
adjustment in future price determinations, which could adversely affect SWS’ business, results of operations, profitability or financial conditions.
Failure to deliver operational performance or cost savings implicit in the Periodic Reviews Operating cost savings to be achieved during the AMP4 Period are implicit in the Periodic Review. To assist the achievement of these operating cost savings, efficiency programmes are underway. If operational performance were to deteriorate, this deterioration may be reflected by less favourable outcomes in future Periodic Reviews which could cause SWS’ profitability to suffer.
Sewer flooding
SWS’ combined sewerage systems (as described more fully in Chapter 4 “Description of the SWS Financing Group”) can, during prolonged heavy rainfall, reach their hydraulic capacity resulting in flooding. As it is not possible to forecast the occurrence of sewer flooding and its effects sufficiently far in advance, forward planning and the making of full and reliable provision for the effects, or the alleviation of the risk, of sewer flooding is difficult. The financial costs of measures required to deal with sewer flooding, or measures designed to alleviate the risk of sewer flooding to properties which become at risk, may therefore not be taken into account fully in a Periodic Review, which could be significant and could adversely affect SWS’ business, results of operations, profitability or financial condition.
Adoption of Private Sewers As set out in Chapter 4 “Description of the SWS Financing Group”, the Government has announced its intention to proceed with the transfer of private sewers and lateral drains to sewerage undertakers (including SWS) from 1 April 2011. SWS will be responsible for the operation and maintenance of the private sewers, the costs of which have not been directly reflected in the Draft Business Plan. Although the Ministerial Statement set the earliest date for transfer, there is still much uncertainty about transfer that has to be resolved, for example the form of transfer – automatic overnight or a voluntary or phased approach; the treatment of private sewage pumping stations and timing of their transfer. SWS understands these details will be included in regulations laid before Parliament later this year and coming into force in 2010. These regulations will be subject to Parliamentary scrutiny and there is therefore the opportunity for Members of Parliament and the House of Lords to amend the draft regulations and reduce or widen their scope. This means it is difficult, at this time, for water and sewerage companies to provide robust cost estimates. The transfer and associated costs will therefore have to be treated as a relevant change of circumstance by the regulator Ofwat during the next AMP Period. SWS may apply to Ofwat for an IDOK, which would enable SWS to pass on some of the financial risk to customers (through regulatory pricing mechanisms). However, the financial costs of operating and maintaining the private sewers that are transferred to SWS could adversely affect SWS’ business, results of operations, profitability or financial condition.
Non-recovery of customer debt Non-recovery of debt is a risk to SWS and may cause SWS’ profitability to suffer. This risk is exacerbated by the WIA, which prohibits the disconnection for non-payment of a water supply for domestic use in any premises and the limiting of a supply with the intention of enforcing payment for domestic use in any premises, although allowance is made by Ofwat in the price limits at each Periodic Review for a proportion of debt deemed to be irrecoverable. SWS is also unable to disconnect commercial customers in areas where another company is the appointed water undertaker under the WIA. To achieve a re-setting of its price limits through an IDOK during a Periodic Review Period when changes in the regulatory assumptions as to the level of non-recoverable debt are material, SWS would need to demonstrate a proven link between increasing levels of non-recoverable debt and the prohibition on disconnection. Increased prices may lead to increases in non-recoverable debt. SWS may therefore suffer losses from its inability to recover its debts fully, which could adversely affect SWS’ business, results of operations, profitability or financial condition.
60
Increases in the price of inputs and/or treatment work rates Energy prices and the cost of chemicals and other substances used by SWS in its treatment processes have increased in recent years. SWS has sought to mitigate the impact of known increases, to the extent that they were not taken into account in the 2004 Final Determination, through efficiency savings built into its business plan. However, further increases in energy prices and/or the cost of other commodities could lead to greater operating costs which could adversely affect SWS’ business, results of operations, profitability or financial condition. The rates charged on SWS’ wastewater treatment works increased in 2005 as a result of the regular five yearly rating review conducted by the Government’s Rating Agency. Again, SWS has sought to mitigate the impact of this through efficiency savings, but further increases at the next evaluation could lead to greater operating costs which could adversely affect SWS’ business, results of operations, profitability or financial condition.
Service interruptions to or contamination of water supplies SWS undertakes maintenance of the assets required for its water supply and sewerage services business with the objective of providing a continuous service. Historically, interruptions to the supply of services have been minor. However, the failure of a key asset (including a reservoir or treatment works) could cause a more significant interruption to the supply of services (in terms of duration or number of customers affected), materially affecting the way that SWS operates, prejudicing its reputation and resulting in additional costs including liability to customers or loss of revenue, each of which could have an adverse effect on SWS’ business, results of operations, profitability or financial condition.
Water supplies may be subject to contamination, including contamination from the presence of naturally occurring compounds and pollution from man-made substances or criminal acts. In the event that SWS’ water supply is contaminated and it is unable to substitute water supply from an uncontaminated water source, or to treat adequately the contaminated water source in a cost-effective manner, there may be an adverse effect on its business, results of operation, profitability or financial condition because of the resulting prejudice to reputation and required capital and operational expenditures. SWS could also be fined for breaches of statutory requirements or regulations, or held liable for human exposure to hazardous substances in its water supplies or other environmental damage, which may also adversely affect SWS’ business, results of operations, profitability or financial condition.
The costs associated with service interruptions or contaminations may be partly recoverable through the mechanisms referred to in Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales” or future Periodic Reviews but, in the event that such recovery is not possible, such costs could be significant and could have an adverse effect on SWS’ business, results of operations, profitability or financial condition. SWS also maintains insurance policies in relation to legal liabilities likely to be associated with these risks. However, all the costs of any such liabilities may not be covered by insurance and insurance coverage may not continue to be available in the future. In addition, contamination of supplies could exacerbate water shortages, giving rise to the issues described below.
Water shortages and flooding SWS is at risk both from the effects of water shortages, caused by prolonged periods of drought, and from the effects of flooding.
SWS obtains a high proportion (approximately 69 per cent.) of the water which it supplies from underground sources rather than rivers and reservoirs, and inadequate winter rainfall over two or more years may prejudice the adequate recharging of such sources.
In the event of water shortages, additional costs may be incurred by SWS in order to provide emergency reinforcement to supplies in areas of shortage which may adversely affect its business, results of operations, profitability or financial condition. In addition, restrictions on the use or supply of water (including hosepipe bans and Drought Orders or Drought Permits) may adversely affect SWS’ turnover and may, in very extreme
61
circumstances requiring an Emergency Drought Order, lead to significant compensation becoming due to customers because of interruptions to supply, both of which could adversely affect SWS’ business, results of operations, profitability or financial condition.
Potential water shortages may be exacerbated by reductions in the volume of water licensed to be abstracted imposed by the EA to mitigate environmental damage or to achieve sustainable levels of abstraction. Costs may be incurred by SWS in implementing replacement sources and abstraction charges could be increased by the EA to cover compensation payments made to other abstractors whose licences are revoked or varied to alleviate environmental impact, each of which could adversely affect SWS’ business, results of operations, profitability or financial condition.
The financial costs of measures taken to deal with flooding could also be significant and may adversely impact on SWS’ operations and financial condition. The fact that it is not possible to forecast the occurrence of flooding makes forward planning and the making of provision for the effects of flooding difficult. Costs incurred by SWS arising from the flooding of its own property which are not fully covered by insurance, compensation to customers in relation to the effects of the inundation of the sewerage system with surface water and work undertaken to prevent reoccurrence may not be recoverable by SWS through adjustments to the price cap formula. Eastney Pumping Station, the principal pumping station draining Portsmouth, was flooded in September 2000 as a result of a storm of a severity encountered on average once every 108 years. The total damage amounted to £2,677,000. Since this incident, a number of improvements have been implemented to provide additional protection from any such events in the future. Due to the nature of the area served by SWS, where large areas are below sea level and there is no gravity outlet to the sea, there remains a risk of a repeat event. To reduce the risk, SWS plans to construct an additional pumping station by 2010, which will provide standby pumping capacity to come into operation in the event of pump failure in the existing station. Provision for this investment was included in the 2004 Final Determination.
There can be no assurance as to whether or not weather patterns will have an adverse effect on the operations or financial condition of SWS, or that existing weather patterns will continue in the future. It is not currently possible to assess the impact that any climate change may have within the medium term on the operations or financial condition of SWS. However, as a utility company, SWS may be required by the Secretary of State in the medium term to report on the current and predicted impact of climate change on its functions, its proposals and policies for adapting to climate change and its progress towards implementing such proposals and policies under the new Climate Change Act 2008, which became law on 26 November 2008, and to comply with any guidance or directions issued by the Secretary of State under that Act.
Depending on developments in case law, sewerage undertakers may in future have to negotiate contracts with the owners of watercourses in order to be able to discharge into them. The additional costs involved are currently expected to be significant.
Disruption at key sites or installations Some of SWS’ sites or installations (including certain reservoirs, pumping stations and/or water or wastewater treatment works) account for a relatively large percentage of the operations of the Appointed Business. These sites and installations are therefore key to the ongoing proper operation of the Appointed Business and as a result SWS’ business, results of operations, profitability or financial condition could be adversely affected in the event of an unexpected major disruption (including because of criminal acts or a major health and safety incident) at one or more of these sites or installations.
Asset Resilience Widespread flooding in Yorkshire and the Home Counties in 2008 demonstrated the potential vulnerability to flooding of some key SWS assets and operational sites. In recognition of this, SWS has assessed the risk of severe fluvial flooding to its water and sewerage assets. The risk is greatest to those sites within the flood risk area identified from EA flood maps and as a general rule, the consequences are greatest for those sites serving
62
the highest population. Full assessment of risk has been undertaken in accordance with guidance contained within the service risk framework for flood hazards commissioned by Ofwat (the “Service Risk Framework”) that companies are advised to follow.
Using the Service Risk Framework, SWS has identified the total number of sites at risk and those sites that would have a significant impact should loss of output occur due to flooding. Mitigation measures have been developed to ensure their protection against significant flood events, so that their outputs are not compromised. Several of these solutions are included in the Final Business Plan and SWS anticipates Ofwat funding for those schemes where the benefits (expressed as a monetary value) are greater than the solution costs.
Changes in the rate of inflation SWS’ turnover is linked to the underlying rate of inflation (measured by the Retail Price Index) and as such is subject to fluctuations in line with changes in the rate of inflation. In addition, changes in the rate of inflation are likely to impact on the operating costs and capital expenditure of SWS and on customers’ ability to pay any increased charges.
SWS’ reported RCV is adjusted by RPI each year when calculating Class A RAR and Senior RAR, and as such is subject to changes in the rate of inflation. In addition, the reported carrying value of index-linked debt and derivatives at the SWS Financing Group is also adjusted by RPI, at different points in time, during each year.
Catastrophe Risk Catastrophic events such as dam bursts, fires, earthquakes, floods, droughts, terrorist attacks, diseases, plant failure or other similar events could result in personal injury, loss of life, pollution or environmental damage, severe damage to or destruction of SWS’ operational assets. Subject to a possible IDOK under the Shipwreck Clause, any costs resulting from suspension of operations of SWS could have a material adverse effect on the ability of SWS to meet its financing obligations.
Although the CTA requires SWS to maintain insurance (including business interruption insurance) to protect against certain of these risks, the proceeds from such insurance may not be adequate to cover reduced revenues, increased expenses or other losses or liabilities arising from the occurrence of any of the events described above. Moreover, there can be no assurance that such insurance coverage will be available for some or all of these risks in the future at commercially reasonable rates or at all (See Chapter 4 “Description of the SWS Financing Group” under “Insurance”).
Certain Legal Considerations
Security A Regulated Company’s ability to grant security over its assets and the enforcement of such security are restricted by the provisions of the WIA and its licence. For example, the WIA restricts a Regulated Company’s ability to dispose of Protected Land (as explained in Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales” under “Protected Land”). Accordingly, a licence restricts a Regulated Company’s ability to create a charge or mortgage over Protected Land. In the case of SWS, the Issuer estimates that the vast majority of SWS’ assets by value are tangible property which is Protected Land and cannot therefore be effectively secured. This necessarily affects the ability of SWS to create a floating charge over the whole or substantially the whole of its business. Furthermore, in any event, there is not right of a floating charge holder under the WIA to block the appointment of a Special Administrator.
The Secretary of State and Ofwat have rights under the WIA to appoint a Special Administrator in certain circumstances in respect of SWS and its business. The appointment of a Special Administrator effectively places a moratorium upon any holder of security from enforcing that security (See the section “Special Administration” below).
63
There are also certain legal restrictions which arise under the WIA and SWS’ Licence affecting the enforcement of the security created under the Security Agreement. For example, such enforcement is prohibited unless the person enforcing the security has first given 14 days’ notice to Ofwat or the Secretary of State, giving them time to petition for the appointment of a Special Administrator (see Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales” under “Security”).
Accordingly, the security provided over the assets of SWS in favour of the Security Trustee in respect of the Issuer’s obligations under the Bonds affords significantly less protection to the Security Trustee (and, therefore, the Bondholders) than would be the case if SWS were not a Regulated Company subject to the provisions of the WIA and its Licence.
The considerations described above do not apply to the fixed and floating charges created under the Security Agreement by SWSGH, SWSH and the Issuer. The enforcement of the security granted under the Security Agreement over the shares in any company in the SWS Financing Group (other than the Issuer), including any holding company of SWS, would not be subject to the moratorium set out in the WIA nor would it be an event which would itself result in the making of the Special Administration Order. Notwithstanding this, given Ofwat’s general duties under the WIA to exercise its powers to ensure that the functions of a Regulated Company are properly carried out, the Issuer anticipates that any intended enforcement of the Security granted by SWSH or SWSGH over, and subsequently any planned disposal to a third party purchaser of, the shares in SWS would involve consultation with Ofwat. In addition, it is anticipated that any intended enforcement of the security created by SWSH or SWSGH under the Security Agreement, to the extent that such enforcement would amount to a relevant merger situation for the purposes of the Enterprise Act 2002 (the “Enterprise Act”) or a concentration with a Community dimension for the purposes of the European Merger Regulation, would require consultation with Ofwat and would be reviewable by the OFT or the European Commission.
Notice of the creation of the SWS Security has not been and will not be given initially to SWS’ customers or to SWS’ contractual counterparties in respect of its contracts (other than certain material contracts). Also, any security over any amounts due from customers that constitute statutory receivables may be limited by law. In addition, if SWS were to acquire any land that was not Protected Land the charge over that land granted by the Security Agreement would take effect in equity only. Accordingly, until any such assignment is perfected, registration effected with HM Land Registry in respect of registered land or certain other action is taken in respect of unregistered land, any such assignment or charge may be or become subject to prior equities arising (such as rights of set-off).
Special Administration The WIA contains provisions enabling the Secretary of State or Ofwat (with the permission of the Secretary of State) to secure the general continuity of water supply, and where applicable, sewerage services by petitioning the High Court for the appointment of a Special Administrator in certain circumstances (for example, where SWS is in breach of its principal duties under its Licence or of the provisions of a final or confirmed provisional enforcement order (and in either case the breach is serious enough to make it inappropriate for SWS to continue to hold its Licence) or is unable, or is unlikely to be able, to pay its debts). In addition, a petition by a creditor of SWS to the High Court for the winding up of SWS might result in the appointment of a Special Administrator where the Court is satisfied that it would be appropriate to make such a winding-up order if the company were not a company holding an appointment under the WIA. The duties and functions of a Special Administrator differ in certain important respects to those of an administrator of a company which is not a Regulated Company.
During the period of the Special Administration Order, SWS has to be managed by the Special Administrator for the purposes of the order and in a manner which protects the interests of shareholders and creditors. As noted above, while the order is in force, no steps may be taken to enforce any security over the property of SWS except with the consent of the Special Administrator or the leave of the Court. A Special Administrator
64
would be able to dispose of assets free of any floating charge existing in relation to them. On such a disposal, however, the proceeds would be treated as if subject to a floating charge which has the same priority as that afforded to the original security. A Special Administrator may not dispose of property which is the subject of a fixed charge without the agreement of the relevant creditor except under an order of the Court. On such a disposal, the Special Administrator must account for the proceeds to the chargee, although the disposal proceeds to which the chargee is entitled are determined by reference to “the best price which is reasonably available on a sale which is consistent with the purposes of the Special Administration Order” as opposed to an amount not less than “open market value”, which would apply in a conventional administration for a company which is not a Regulated Company under English insolvency legislation.
Because of the statutory purposes of a Special Administration Order, it is not open to a Special Administrator to accept an offer to purchase the assets on a break-up basis in circumstances where the purchaser would be unable properly to carry out the relevant functions of a Regulated Company. The transfer is effected by a transfer scheme which the Special Administrator puts in place (the “Transfer Scheme”), subject to the approval of the Secretary of State or Ofwat on behalf of the existing Regulated Company. The Transfer Scheme may provide for the transfer of the property, rights and liabilities of the existing Regulated Company to the new Regulated Company(ies) and may also provide for the transfer of the existing Regulated Company’s licence (with modifications as set out in the Transfer Scheme) to the new Regulated Company(ies) (See Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales” under “Special Administration Orders”).
There can be no assurance that any Transfer Scheme in the context of a Special Administration regime could be achieved on terms that would enable creditors to recover amounts due to them in full.
Insolvency Considerations: The Enterprise Act The Enterprise Act sets out certain reforms to corporate insolvency law contained in the Insolvency Act 1986, including the introduction of a prohibition on appointment of an administrative receiver in relation to companies incorporated in England and Wales such as SWSH and SWSGH. Unless a floating charge falls within one of the exceptions contained in the Enterprise Act, the holder of a qualifying floating charge will be prohibited from appointing an administrative receiver to a company and consequently, the ability to prevent the appointment of an administrator to such company will be lost. Such ability will not be applicable in the case of SWS which is subject to the Special Administration regime (see the section “Risk Factors – Certain Legal Considerations – Special Administration” above).
The Enterprise Act also provides that, on an insolvency of a company, a certain proportion of realisations in respect of certain classes of assets subject to a floating charge shall be made available for the satisfaction of unsecured creditors.
However, the ability to appoint an administrative receiver to prevent an administration and the making available of the prescribed portion of realisations on an insolvency are unlikely to be of significance in the case of companies such as SWSH and SWSGH which are subject to substantial restrictions on their activities. In addition, such ability will not be applicable in the case of SWS, which is subject to the special administration regime.
Environmental Considerations SWS’ water supply and sewerage operations are subject to a number of laws and regulations relating to the protection of the environment and human health governed primarily by the DWI and the EA as described in Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales” under “Drinking Water and Environmental Regulation”. These laws establish, amongst other things, standards for drinking water, abstraction, and the discharge of wastewater and other polluting discharges into the environment, and procedures governing operational development.
65
It is possible that SWS and other Regulated Companies will incur significant costs in the future in order to comply with requirements imposed under existing or future environmental laws and regulations (including nature conservation legislation). Although the costs arising from such changes in legal requirements (see Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales” under “Drinking Water and Environmental Regulation”) may, in certain cases, be eligible for the purposes of the IDOK provisions or fall to be considered as part of a Periodic Review, there can be no certainty as to how and whether future environmental laws and regulations will impact the business and financial condition of SWS and/or the interests of the Bondholders. It is possible that Ofwat may determine that the cost of fulfilling certain obligations is likely to be less than the cost actually incurred by SWS in fulfilling such obligations. In such circumstances, the funding allowed by Ofwat may not totally cover the actual costs and SWS would bear this additional element. In practice, the funding allowed by Ofwat is set for a package of obligations and some will cost more and some less.
SWS is under a duty to supply water that is wholesome at the time of supply. “Wholesomeness” is defined by reference to standards and other requirements set out in the Water Quality Regulations. Under the WIA, the DWI is required to take enforcement action against SWS for any breach of quality standards, or of monitoring, treatment, record keeping and/or information requirements of the Water Quality Regulations, unless the breach is trivial or unlikely to recur, or SWS has taken immediate remedial action, or has submitted a legally binding programme of work in the form of a Section 19 Undertaking to achieve compliance within an acceptable timescale. If there has been such a breach and SWS does not give a Section 19 Undertaking or fails to comply with its terms, the DWI may make a provisional or final Enforcement Order to secure compliance. In addition, SWS may be prosecuted and fined if it supplies water that is unfit for human consumption under section 70 of the WIA. Section 19 Undertakings, enforcement action and prosecutions could materially affect the way that SWS operates, prejudice its reputation and result in the imposition of substantial fines or other costs, each of which could adversely affect SWS’ business, results of operations, profitability or financial position.
Drinking water quality standards may be more rigorously enforced over time and may become more stringent and new drinking water requirements may be introduced (for instance, mandatory fluoridation). Each of these factors could increase SWS’ operating and/or capital costs. These costs may be wholly or partly recoverable through the mechanisms referred to in Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales” or future Periodic Reviews, but, in the event that such recovery is not possible, such costs could adversely affect SWS’ business, results of operations, profitability or financial position.
Given the nature of SWS’ operations, there is a risk that pollution or drinking water quality incidents may occur. The possible consequences of any such incident include criminal prosecution leading to the imposition of fines on SWS, civil liability in damages to third parties and/or requirements to clean up or otherwise deal with the effects of contamination and/or operational requirements to upgrade plant and equipment. The imposition of (potentially unlimited) fines, civil liability, clean-up or upgrade costs may materially and adversely affect SWS’ reputation, the business and financial position of SWS. Any such incidents may also give rise to breaches of any operational environmental permits held by SWS, which could result in fines and/or termination.
As a large consumer of energy, SWS is likely to incur increased costs directly and indirectly by carbon trading schemes. Most electricity generators will be required to purchase all of their carbon allowances in phase III of the EU Emissions Trading Scheme (2013–2020) as there is to be no free allocation except in limited circumstances. This is likely to lead to an increase in electricity costs. In addition, SWS is likely to fall within the scope of the UK’s “Carbon Reduction Commitment” (a scheme initiated by DEFRA), which will require large consumers of electricity to purchase allowances to cover their carbon dioxide emissions from October 2010.
66
High Leverage The SWS Financing Group has indebtedness that is substantial in relation to its shareholders equity. Taking into account retained cash reserves, such leverage of the SWS Financing Group was approximately 77 per cent. of RCV as at 31 March 2008. In addition, the Issuer has borrowings of £233.2 million under the Mezzanine Facilities and SWS has in issue Preference Shares for a consideration of £260 million, each of which are subordinated to the Class A Debt and the Class B Debt pursuant to the Intercreditor Arrangements. The ability of SWS to improve its operating performance and financial results will depend upon economic, financial, competitive, regulatory and other factors beyond its control, including fluctuations in interest rates, inflation and other general economic conditions in the United Kingdom.
Accordingly, there can be no assurance as to SWS’ ability to meet its financing requirements and no assurance that SWS’ high degree of leverage will not have a material adverse impact on its ability to pay amounts under the Issuer/SWS Loan Agreements, which would enable the Issuer to pay amounts due and owing in respect of the Bonds. Incurrence of additional indebtedness by SWS or the Issuer, which is permitted under the Finance Documents, may materially affect the ability of SWS, the Issuer or the other Obligors to pay amounts due and owing in respect of the Bonds.
Future Financing The SWS Financing Group will need to raise further debt from time to time in order, among other things, to:
(i) finance future capital enhancements to SWS’ asset base;
(ii) on each Interest Payment Date on which principal is required to be repaid and on the maturity date of the relevant Sub-Classes of Bonds, refinance the Bonds; and
(iii) refinance any other debt (including for liquidity or working capital purposes) the terms of which have become inefficient or which have a scheduled partial or final maturity prior to the final maturity of the Bonds.
While the Common Terms Agreement and the STID contemplate the terms and conditions on, and circumstances under, which such additional indebtedness can be raised, there can be no assurance that the SWS Financing Group will be able to raise sufficient funds, or funds at a suitable interest rate, or on suitable terms, at the requisite time such that the purposes for which such financing is being raised are fulfilled, and in particular such that all amounts then due and payable on the Bonds or any other maturing indebtedness will be capable of being so paid when due.
Issuer and Bond Considerations
Special Purpose Vehicle Issuer The Issuer is a special purpose financing entity with no business operations other than raising the original acquisition finance for the First Aqua Acquisition, refinancing part of such financing, upon the acquisition by SWI of the Issuer, and further refinancing the same and raising external funding for SWS through the issuance of the Bonds and borrowing under the Mezzanine Facilities, the Liquidity Facilities and Authorised Credit Facilities and entering into various Hedging Agreements. Other than the proceeds of the issuance of additional Bonds, the Issuer’s principal source of funds will be pursuant to the Issuer/SWS Loan Agreements and funds available to it pursuant to the Liquidity Facilities and other Authorised Credit Facilities.
Therefore, the Issuer is subject to all the risks relating to revenues and expenses to which SWS is subject. Such risks could limit funds available to SWS to enable SWS to satisfy in full and on a timely basis its obligations under the Issuer/SWS Loan Agreements and its guarantee under the Security Agreement (See “SWS Revenue and Cost Considerations” above).
67
Source of Payments to Bondholders Although the Class A Wrapped Bonds and Class B Wrapped Bonds will have the benefit of the relevant Financial Guarantee, none of the Bonds of any Class will be obligations or responsibilities of, nor will they be guaranteed by, any of the Other Parties (other than the Guarantors and, in the case of the Wrapped Bonds, the relevant Financial Guarantor). The guarantees by SWSGH and SWSH may be of limited value, because neither of them own, nor will own, any significant assets other than their direct or indirect shareholding in SWS.
Moreover, a Financial Guarantor will guarantee to the holders of the Class A Wrapped Bonds and holders of the Class B Wrapped Bonds only the payment of scheduled principal and interest; it will not guarantee FG Excepted Amounts.
Subordination of the Class B Bonds Payments under the Class A Wrapped Bonds and the Class A Unwrapped Bonds (each of whatever Sub-Class) rank in priority to payments of principal and interest due on all Sub-Classes of the Class B Bonds. The Class A Wrapped Bonds and the Class A Unwrapped Bonds (each of whatever Sub-Class) rank pari passu.
If, on any Interest Payment Date, prior to the taking of Enforcement Action after the termination of a Standstill Period, there are insufficient funds available to the Issuer to pay accrued interest or principal on the Class B Unwrapped Bonds (after taking into account any amounts available to be drawn under any DSR Liquidity Facility or from the Debt Service Reserve Account), the Issuer’s liability to pay such accrued interest will be treated as not having fallen due and will be deferred until the earliest of (i) the next following Interest Payment Date on which the Issuer has, in accordance with the Payment Priorities, sufficient funds available to pay such deferred amounts (including any interest accrued thereon); (ii) the date on which all Class A Debt has been paid in full; and (iii) an Acceleration of Liabilities (other than a Permitted Hedge Termination or a Permitted Lease Termination) and, in the case of a Permitted Share Pledge Acceleration, only to the extent that there would be sufficient funds available in accordance with the Payment Priorities to pay such deferred amounts (including accrued interest thereon). Interest will, however, accrue on such deferred amounts.
Notwithstanding the subordination of, and credit enhancement provided by, the Class B Bonds to the Class A Wrapped Bonds and Class A Unwrapped Bonds, the Issuer may, subject to certain conditions, optionally redeem some or all of the Bonds subordinated and providing credit enhancement to other Classes of Bonds.
It should be noted that all of the Payment Dates for the various different types of Class A Debt and Class B Debt will not necessarily coincide and that, until a Standstill Period has commenced, there is no obligation to ensure that a payment made to a holder of a Class B Bond (or any other Class B Debt Provider pursuant to any other Class B Debt) will not lead to a deficiency of funds to make payments in respect of Class A Debt that falls due on a later date.
Hedging Risks The Issuer may be left exposed to interest rate risk or currency risk in the event that there is an early termination of any Hedging Agreement. A Hedging Agreement may be terminated in the circumstances set out in Chapter 7 “Summary of the Financing Agreements” under “Hedging Agreements”, including where the Hedge Counterparty is required to gross up for, or receive, payments from which tax has been required to be deducted or withheld by law, which requirement has not been able to be avoided, notwithstanding the Issuer and the Hedge Counterparty having used reasonable endeavours so to do in accordance with the relevant Hedging Agreement. If a Hedging Agreement is terminated and the Issuer is unable to find a replacement Hedge Counterparty, then the funds available to the Issuer may be insufficient to meet fully its obligations under the Bonds, as a result of adverse fluctuations in interest rates and exchange rates or making any termination payment to the Hedge Counterparty, which payment will be in accordance with the Payments Priorities (see Chapter 7 “Summary of the Financing Agreements” under “Cash Management”).
68
The DSR Liquidity Facilities The DSR Liquidity Facilities and any amounts credited to the Debt Service Reserve Account are intended to cover certain shortfalls in the ability of the Issuer to service payments in relation to the Class A Debt and Class B Debt on any Interest Payment Date (excluding the repayment of principal under the Bonds and the payment of any Subordinated Coupon Amounts under the Class B Bonds). However, on any such Interest Payment Date, there are no assurances that any such shortfalls will be met in whole or in part by amounts standing to the credit of the Debt Service Reserve Account or by the DSR Liquidity Facilities.
Rights Available to Bondholders The Bond Trust Deed contains provisions detailing the Bond Trustee’s obligations to consider the interests of the Bondholders as regards all powers, trusts, authorities, duties and discretions of the Bond Trustee (except where expressly provided otherwise). Where, in the sole opinion of the Bond Trustee, there is a conflict of interest between the holders of two or more Sub-Classes of Bonds of such Class, the Bond Trustee shall consider the interests of the holders of the Sub-Class of the Class A Bonds or, if there are no Class A Bonds outstanding, the Class B Bonds outstanding with the shortest dated maturity and will not have regard to the consequences of such exercise for any other Bondholders or any other person. To the extent that the exercise of any rights, powers, trusts and discretions of the Bond Trustee affects or relates to any Class A Wrapped Bonds or Class B Wrapped Bonds, the Bond Trustee shall only act with the consent of the relevant Financial Guarantor(s) (unless an FG Event of Default has occurred and is continuing with respect to such Financial Guarantor) in accordance with the Bond Trust Deed. The STID provides that the Security Trustee (except in relation to certain Reserved Matters and Entrenched Rights as set out in the STID) will act on instructions of the relevant DIG Representative(s). When so doing, the Security Trustee is not required to have regard to the interests of any Finance Party (including the Bond Trustee as trustee for the Bondholders) in relation to the exercise of such rights and, consequently, has no liability to the Bondholders as a consequence of so acting.
Intercreditor Rights of Bondholders The Bonds are subject to the provisions of the STID. The STID contains provisions enabling the Security Trustee to implement various modifications, consents and waivers in relation to the Finance Documents and the Bonds, subject to Entrenched Rights and Reserved Matters. See Chapter 7 “Summary of the Financing Agreements” under “Security Trust and Intercreditor Deed – Entrenched Rights and Reserved Matters”. The Security Trustee is authorised to act on the instructions of the Class A DIG, or following repayment of the Class A Debt, the Class B DIG. Prior to a Default Situation, a Bondholder will not be entitled to vote other than in respect of Entrenched Rights and Reserved Matters.
Prior to a Default Situation, the Bond Trustee may vote on behalf of the Unwrapped Bondholders and (if an FG Event of Default has occurred and is continuing in relation to the relevant Financial Guarantor) the Wrapped Bondholders as part of the Instructing Group. However, the Bond Trustee will not be obliged to vote and will not be entitled to convene a meeting of Bondholders to seek directions in respect of such vote. Accordingly, subject to Entrenched Rights and Reserved Matters of the Bondholders, prior to a Default Situation, the Outstanding Principal Amount of the Wrapped Bonds (during the continuance of an FG Event of Default in relation to the relevant Financial Guarantor) and the Unwrapped Bonds will not be voted as part of the Class A DIG or Class B DIG, as the case may be, in circumstances where the Bond Trustee is unable or unwilling to exercise its discretion.
During a Default Situation, the Bond Trustee shall be entitled to vote and will be entitled to seek directions from the relevant Bondholders in respect of such vote. However, the Bond Trustee may be prevented from voting if a valid Emergency Instruction Notice is delivered to the Security Trustee. See Chapter 7 “Summary of the Financing Agreements” under “Emergency Instruction Procedure”. In respect of a vote relating to Entrenched Rights and Reserved Matters, the Bond Trustee will be required to seek directions from the Bondholders of each affected Series of Bonds in respect of such vote.
69
Accordingly, subject to the Entrenched Rights and Reserved Matters of the Bondholders, decisions relating to and binding upon the Bonds may be made by persons with no interest in the Bonds and the Bondholders may be adversely affected as a result. See Chapter 7 “Summary of the Financing Agreements” under “Security Trust and Intercreditor Deed”.
Under the terms of the STID and the CTA, any further issues of debt securities by the Issuer must be made subject to the intercreditor arrangements contained in the CTA and the STID (to which the Bonds are also subject). No alteration of the rights of priority of the holders of Class A Bonds or, as the case may be, Class B Bonds may be made without the consent of the relevant Bondholders.
These Entrenched Rights and Reserved Matters may materially and adversely affect the exercise and proceeds of any enforcement of the Security.
Subject to such Entrenched Rights and Reserved Matters, the Majority Creditors or, where appropriate, Super- Majority Creditors may make a modification to, or grant any consent or waiver in respect of, the Finance Documents without the need to seek a confirmation from the Rating Agencies as to the then current ratings of the Bonds.
Limited Liquidity of the Bonds; Absence of Secondary Market for the Bonds There can be no assurance that a secondary market will develop, or, if a secondary market does develop for any of the Bonds issued after the date of the Prospectus, that it will provide any holder of Bonds with liquidity or that any such liquidity will continue for the life of the Bonds. Consequently, any purchaser of the Bonds must be prepared to hold such Bonds for an indefinite period of time or until final redemption or maturity of the Bonds.
The liquidity and market value at any time of the Bonds is affected by, among other things, the market view of the credit risk of such Bonds and will generally fluctuate with general interest rate fluctuations, general economic conditions, the condition of certain financial markets, international political events, the performance and financial condition of SWS, developments and trends in the water industry generally and events in the appointed area of SWS.
Investors should note that, in view of the prevailing and widely reported global credit market conditions (which continue at the date hereof), the secondary market for the Bonds may be illiquid. The Issuer is not able to express a view as to when these circumstances might change. Accordingly, an investor may not be able to dispose of a Bond or, if disposing of a Bond prior to maturity, may suffer a loss for reasons unrelated to the credit quality of the underlying Bonds.
Indexed Bonds and Dual Currency Bonds The Issuer may issue Bonds with principal or interest determined by reference to an index or formula, to changes in the prices of securities or commodities, to movements in currency exchange rates or other factors (each, a “Relevant Factor”). In addition, the Issuer may issue Bonds with principal or interest payable in one or more currencies which may be different from the currency in which the Bonds are denominated. Potential investors should be aware that:
(i) the market price of such Bonds may be volatile;
(ii) they may receive no interest;
(iii) payment of principal or interest may occur at a different time or in a different currency than expected;
(iv) the amount of principal payable at redemption may be less than the nominal amount of such Bonds or even zero;
(v) a Relevant Factor may be subject to significant fluctuations that may not correlate with changes in interest rates, currencies or other indices;
70
(vi) if a Relevant Factor is applied to Bonds in conjunction with a multiplier greater than one or contains some other leverage factor, the effect of changes in the Relevant Factor on principal or interest payable likely will be magnified; and
(vii) the timing of changes in a Relevant Factor may affect the actual yield to investors, even if the average level is consistent with their expectations. In general, the earlier the change in the Relevant Factor, the greater the effect on yield.
Rating of the Bonds The ratings assigned by the Rating Agencies to the Class A Wrapped Bonds and any Class B Wrapped Bonds to be issued are based solely on the claims paying ability of the applicable Financial Guarantor and reflect only the views of the Rating Agencies. The ratings assigned by the Rating Agencies to the Class A Unwrapped Bonds and the Class B Unwrapped Bonds reflect only the views of the Rating Agencies and in assigning the ratings the Rating Agencies take into consideration the credit quality of SWS and structural features and other aspects of the transaction.
A rating is not a recommendation to buy, sell or hold securities and will depend, among other things, on certain underlying characteristics of the business and financial condition of SWS or, in the case of the Wrapped Bonds, of the relevant Financial Guarantor from time to time.
There is no assurance that any such ratings will continue for any period of time or that they will not be reviewed, revised, suspended or withdrawn entirely by the Rating Agencies (or any of them) as a result of changes in, or unavailability of, information or if, in the Rating Agencies’ judgement, circumstances so warrant. If any rating assigned to the Bonds is lowered or withdrawn, the market value of the Bonds may be reduced. Future events, including events affecting SWS and/or circumstances relating to the water industry generally, could have an adverse impact on the ratings of the Bonds.
Withholding Tax under the Bonds In the event withholding taxes are imposed by or in any jurisdiction in respect of payments due under the Bonds, the Issuer is not obliged to gross-up or otherwise compensate Bondholders for the fact that the Bondholders will receive, as a result of the imposition of such withholding taxes, cash amounts which are less than those which would otherwise have been the case. The Issuer will, in such event, have the option (but not the obligation) of:
(i) redeeming all outstanding Bonds in full; or
(ii) arranging for the substitution of another company in an alternative jurisdiction (subject to certain conditions).
(See Chapter 8 “The Bonds” under “Terms and Conditions of the Bonds” and Condition 8(c) (Redemption for Index Event, Taxation or Other Reasons).)
Likewise, in the event withholding taxes are imposed in respect of payments due under the Wrapped Bonds and the relevant Financial Guarantor is called upon under its Financial Guarantee or Financial Guarantees to make payments in respect of such payments, such Financial Guarantor is not obliged to gross-up or otherwise compensate the holders of such Wrapped Bonds for the fact that such Wrapped Bondholders will receive, as a result of the imposition of such withholding taxes, cash amounts which are less than those which would otherwise have been the case.
EU Savings Directive Under EC Council Directive 2003/48/EC on the taxation of savings income, each Member State is required to provide to the tax authorities of another Member State details of payments of interest (or similar income) paid by a person within its jurisdiction to an individual resident in that other Member State. However, for a transitional period, Belgium, Luxembourg and Austria are instead required (unless during that period they
71
elect otherwise) to operate a withholding system in relation to such payments (the ending of such transitional period being dependent upon the conclusion of certain other agreements relating to information exchange with certain other countries). A number of non-EU countries and territories, including Switzerland, have adopted similar measures (a withholding system in the case of Switzerland) with effect from the same date.
Change of Law The structure of the transaction and, among other things, the issue of the Bonds and ratings assigned to the Bonds are based on law, tax and administrative practice in effect at the date hereof, and having due regard to the expected tax treatment of all relevant entities under such law, tax and administrative practice. No assurance can be given that there will not be any change to such law, tax or administrative practice after the date of this Prospectus which change might impact on the Bonds and the expected payments of interest and repayment of principal.
European Monetary Union Prior to the maturity of the Bonds, the United Kingdom may become a Participating Member State in the Economic and Monetary Union and the euro may become the lawful currency of the United Kingdom. Adoption of the euro by the United Kingdom may have the following consequences:
(i) all amounts payable in respect of the sterling denominated Bonds may become payable in euro;
(ii) the introduction of the euro as the lawful currency of the United Kingdom may result in the disappearance of published or displayed rates for deposits in sterling used to determine the rates of interest on the Bonds or changes in the way those rates are calculated, quoted and published or displayed; and
(iii) the Issuer may choose to redenominate the Bonds into euro and take additional measures in respect of the Bonds. (See Chapter 8 “The Bonds” under “Terms and Conditions of the Bonds”). The introduction of the euro could also be accompanied by a volatile interest rate. It cannot be said with certainty what effect, if any, adoption of the euro by the United Kingdom will have on investors in the Bonds.
The potential costs to SWS of implementing procedures to deal with any possible future adoption of the euro by the United Kingdom are unclear but could be significant.
Changes in Financial Reporting Standards Certain provisions of the Transaction Documents contain certain conditions and/or triggers which are based upon an assessment of the financial condition of the SWS Financing Group calculated by reference to the financial statements produced in respect of the companies in the SWS Financing Group. These financial and other covenants have been set at levels which are based on the current accounting principles, standards, conventions and practices adopted by the relevant companies.
It is possible that any future changes in these accounting principles, standards, conventions and practices which are adopted by the companies in the SWS Financing Group may result in significant changes in the reporting of its financial performance (e.g. the introduction of International Financial Reporting). This, in turn, may necessitate that the terms of the conditions and triggers referred to above are renegotiated.
Funding Risks in relation to the Defined Benefits under SWPS The two pension schemes which operate predominantly for SWS employees are the SWPS and a CSP (together, the “Pension Schemes”). The SWPS is a funded defined benefit arrangement and the CSP is a defined contribution scheme.
The primary liability for funding the SWPS rests with SWS. By virtue of the Pensions Act 2004, there will be risks for SWS Financing Group arising from the operation of SWPS. Many of these are generic risks associated with the operation of UK defined benefit pension schemes generally.
In summary, the main risk factors are:
72
(a) The Pensions Act 2004 will allow the UK pensions regulatory body (the “Pensions Regulator”) to impose a scheme funding target and employer contribution rate if those matters cannot be agreed between the scheme trustees and the employers and is expected to result in more onerous funding requirements for employers.
(b) The trustees of SWPS have power to wind up the relevant scheme in certain circumstances (e.g. if they think it unlikely that sufficient funding will be available to provide all benefits in full). As a result of recent changes in legislation, winding up the schemes would result in a statutory obligation on the various participating employers to fund the schemes by reference to a “buy-out basis”. Additionally, regulations provide that a similar statutory debt would be triggered if SWS went into liquidation.
(c) The Pensions Act 2004 gives new powers to the Pensions Regulator to require funding or funding guarantees for defined benefit pension schemes from any company in the same group as the participating employers. This applies regardless of whether the companies sought to be made liable have any employees in the pension schemes concerned.
(d) The trustees of SWPS have control over the investment of the relevant scheme’s assets and could (having taken appropriate investment advice and consulted with the employers) alter the investment profile of the schemes. For example, they could exchange equity investments for bonds, which would typically increase the employer funding obligations in relation to the schemes because of the lower rate of return expected from lower risk bonds.
The foregoing risks are linked to the funding level of the schemes, which can be adversely affected by a number of factors including:
(i) reducing bond yields (low yields mean a pension obligation is assessed as having a high value);
(ii) increasing life expectancy (which will make pensions payable for longer and, therefore, more expensive to provide);
(iii) investment returns below expectation;
(iv) actual and expected price inflation (many benefits are linked to price inflation and, ignoring any compensating change in the value of assets and future expected investment returns, an increase in inflation will result in higher benefits being paid);
(v) funding volatility as a result of the mismatch between the assets held and the assets by reference to which the scheme liabilities are calculated; and
(vi) other events occurring which make past service benefits more expensive than anticipated in the actuarial assumptions by reference to which past pension contributions were assessed, including unanticipated changes to legislation or tax laws.
Employer obligations to their pension schemes (including any statutory debt) generally rank as unsecured and non-preferential obligations of the employer, with some limited exceptions.
In the 2004 Final Determination, some allowance was made for anticipated future pensions contributions and a proportion of existing pension scheme deficits are recoverable through the price limits established by Ofwat, but Ofwat may seek not to make such allowances in future Periodic Review Periods. If such deficits were not so recoverable in future, SWS’ business, results of operations, profitability or financial condition could be adversely affected.
Trading in the Clearing systems - integral multiples of less than €50,000 In relation to any issue of Bonds which have a denomination consisting of the minimum Specified Denomination of €50,000 plus a higher integral multiple of another smaller amount, it is possible that the Bonds may be traded in amounts in excess of €50,000 (or its equivalent) that are not integral multiples of
73
€50,000 (or its equivalent). In such a case a holder who, as a result of trading such amounts, holds a principal amount of less than the minimum Specified Denomination may not receive a definitive Bond in respect of such holding (should definitive Bonds be printed) and would need to purchase a principal amount of Bonds such that its holding amounts to a Specified Denomination.
74
CHAPTER 6 REGULATION OF THE WATER AND WASTEWATER INDUSTRY IN ENGLAND AND WALES
Water and Wastewater Regulation Generally
Background The current structure of the water and wastewater industry in England and Wales dates from 1989, when the Water Act 1989 was enacted. Before this, as a consequence of the Water Act 1973, there were 10 regional public sector water authorities supplying water and wastewater services and 29 privately-owned statutory water companies supplying water only. Under the Water Act 1989, the functions of the water authorities relating to water supply (except in areas where those functions were carried out through statutory water companies) and wastewater services, together with the majority of the water authorities’ property, rights and liabilities, were transferred to 10 companies appointed as water and sewerage undertakers in England and Wales. The industry is now made up of the 10 water and sewerage companies and 12 water only companies which are all subject to the same regulatory regime (together, the “Regulated Companies”, but unless otherwise expressly stated, references to a “Regulated Company” in this Chapter 6 are references to that company in its capacity as a water and sewerage undertaker or, as the case may be, a water undertaker). The provisions of the Water Act 1989 are now contained mainly in the consolidating WIA which itself has been substantially amended by the Water Industry Act 1999, the Water Act and to a lesser extent various other statutory provisions. References in this Chapter 6 to statutes are to the WIA unless otherwise stated.
Regulatory Framework The activities of Regulated Companies are principally regulated by the provisions (as amended) of the WIA, the WRA and regulations made under these Acts and the conditions of their licences (also referred to as “Instruments of Appointment”). Under the WIA, the Secretary of State has a duty to ensure that at all times there is an appointee for every area of England and Wales. Appointments may be made by the Secretary of State or in accordance with a general authorisation given by Ofwat.
The economic regulator for water and wastewater is Ofwat. Ofwat is responsible for, among other things, setting limits on charges and monitoring and enforcing licence obligations. Regulated Companies are required by their licences to make an annual return to Ofwat (including accounts and financial information) to enable Ofwat to assess their activities and affairs. The two principal quality regulators are the DWI (the DWI is appointed by the Secretary of State for the Environment, Food and Rural Affairs) and the EA. The DWI’s principal task is to ensure that Regulated Companies in England and Wales are fulfilling their statutory requirements under the WIA and the Water Quality Regulations for the supply of wholesome drinking water. The DWI is part of the Department of Environment, Food and Rural Affairs (“DEFRA”) and acts as a technical assessor on behalf of the Secretary of State in respect of the quality of drinking water supplies. It carries out annual technical audits of each water undertaker; this includes an assessment (based on information supplied by the company) of the quality of water in each supply zone, arrangements for sampling and analysis, and progress made on achieving compliance with regulatory and EU requirements. The EA was established under the Environment Act 1995 and is responsible, in England and Wales, for the protection and improvement of the environment. Its duties include the regulation of abstractions from, and discharges to, controlled waters. Controlled waters include coastal waters, territorial waters extending three miles from shore, inland freshwaters and groundwater.
The description given in this document relates to the structure and regulations that apply in England. Although the structure of the water and wastewater industry is the same in Wales, different regulations sometimes apply. There are different structures and different regulatory frameworks for water and wastewater services in the remainder of the United Kingdom (Scotland and Northern Ireland).
75
Ofwat and the Secretary of State As provided for in the Water Act, the DGWS has been replaced by the WSRA as from 1 April 2006 but it continues to be referred to as Ofwat. The WSRA is a body corporate comprising a chairman, a chief executive director, three executive directors and five non-executive directors. The present Chairman of Ofwat is Philip Fletcher, who was appointed in January 2006 for a period of five years. Philip Fletcher was previously at the DGWS, to which post he was appointed in 2000. Ofwat has therefore taken over all functions and duties previously performed by the DGWS with some additions made by the Water Act.
Each of the Secretary of State and Ofwat has a primary duty under the WIA to exercise and perform its powers and duties under the WIA in the manner it considers best calculated to:
– further the consumer objective;
– secure that the functions of Regulated Companies are properly carried out throughout England and Wales;
– secure that Regulated Companies are able (in particular, by securing reasonable returns on their capital) to finance the proper carrying out of those functions; and
– secure that the activities authorised by the licence of a licensed water supplier (see the section “The Water Act” below) and any statutory functions imposed on it are properly carried out.
The consumer objective is to protect the interests of consumers wherever appropriate by promoting competition between persons engaged in, or in commercial activities connected with, the provision of water and sewerage services. For the purpose of the consumer objective, the “interests of consumers” requires Ofwat to take into account the interests of all consumers. However, Ofwat must have regard in particular to consumers who are disabled or chronically sick, of pensionable age, with low incomes or residing in rural areas as well as customers of Regulated Companies whose premises are not eligible to be supplied by a licensed water supplier (see the section “Competition in the Water Industry - The Water Act” below). In addition, the Secretary of State and Ofwat have the power, in exercising any function in relation to water and sewerage services, to have regard to any interests of consumers of gas, electricity and telecommunications services that are affected by the carrying out of that function.
Subject to these primary duties, each of the Secretary of State and Ofwat is required to exercise and perform its powers and duties in the manner it considers best calculated to:
– promote economy and efficiency on the part of Regulated Companies;
– secure that there is no undue preference or discrimination in the fixing of charges;
– protect the interests of customers of Regulated Companies (and companies connected with them) in respect of non-regulated activities in particular by ensuring that (i) transactions are carried out at arm’s length, and (ii) in relation to their regulated business, Regulated Companies maintain and present accounts in a suitable form and manner;
– protect the interests of customers in connection with the benefits that could be secured for them by the application of the proceeds of disposal by Regulated Companies of Protected Land; and
– contribute to the achievement of sustainable development.
There is also a power for the Secretary of State to issue statutory guidance to Ofwat concerning how Ofwat might contribute to social and environmental policies. There is also a duty on DEFRA to encourage water conservation and on all public authorities, as defined, to take into account, where relevant, the desirability of conserving water supplied or to be supplied to premises.
76
Licences
General Under the WIA, each Regulated Company holds a licence and is regulated through the conditions of such licence as well as the WIA. Each licence specifies the geographic area served by the company and imposes a number of conditions on the licence holder that relate to limits on charges, information reporting requirements, various codes of practice, and other matters. In addition to the conditions regulating price limits (see the section “Economic Regulation” below), each licence also contains conditions regulating infrastructure charges and the making of charges schemes, and imposes prohibitions on undue discrimination and undue preference in charging. Other matters covered by conditions in each licence include: accounts and the provision of accounting information; codes of practice for customers on disconnection and on leakage; levels of service and service targets; “ring-fencing” of assets and restrictions on disposal of land; asset management plans; the provision of information to Ofwat; provision of combined and wholesale water supplies; and payments to customers for supply interruptions because of drought. Further details of SWS’ Licence are provided in Chapter 4 “Description of the SWS Financing Group”, including an overview of the Licence modifications Ofwat introduced into SWS’ Licence in 2008. Ofwat is responsible for monitoring compliance with licence conditions and, where necessary, enforcing compliance through procedures laid down in the WIA. See the section “Enforcement Powers” below.
The Water Act introduced new forms of licences that are required to be held by new entrants on the water supply side of the industry engaged in common carriage or retail activities (see the section “Competition in the Water Industry - The Water Act” below).
Termination of a Licence There are certain circumstances provided for in the WIA under which a Regulated Company could cease to hold a licence for all or part of its area:
– a Regulated Company could consent to the making of a replacement appointment or variation, which changes its appointed area, in which case Ofwat has the authority to appoint a new licence holder;
– under condition O of a licence, where the Secretary of State has given the Regulated Company at least 25 years’ notice and that period of notice has expired;
– under the provisions of the Special Administration regime, the Special Administrator may transfer the business and licence to a successor (see the section “Special Administration Orders” below); or
– by the granting of an “inset” appointment over part of a Regulated Company’s existing appointed area to another Regulated Company (see below).
Before making an appointment or variation replacing a Regulated Company, Ofwat or the Secretary of State must consider any representations or objections made. In making an appointment or variation replacing a Regulated Company and, where the Secretary of State or Ofwat makes such an appointment or variation, in determining what provision should be made for the fixing of charges by the new Regulated Company, it is the duty of the Secretary of State or Ofwat to ensure, so far as may be consistent with their duties under the WIA, that the interests of the members and creditors of the existing Regulated Company are not unfairly prejudiced as regards the terms on which the new Regulated Company could accept transfers of property, rights and liabilities from the existing Regulated Company.
An inset appointment can be granted to a company seeking to provide water and/or wastewater services on an unserviced site, or to a large user of water and/or wastewater services within an existing Regulated Company’s area, or where the incumbent Regulated Company consents to the variation. The threshold for large user insets has been reduced, from 250 to 50 megalitres of water supplied or likely to be supplied to particular premises in any 12 month period, which has increased the number of large users that are able to qualify for inset appointments. The inset mechanism continues alongside the introduction of the new regime
77
for licensing new entrants under the Water Act. New entrants have been able to apply for a water supply licence (see the section “Special Administration Orders” below) since 1 August 2005. To date, seven new entrants (including Aquavitae (U.K.) Limited (“Aquavitae”)) have sought and been granted water supply licences. On 20 June 2008, however, Ofwat issued a notice revoking the water licence of Aquavitae, following Aquavitae going into administration. Ofwat revoked Aquavitae’s licence because the company was or was likely to be unable to pay its debt. Aquavitae did not have any water supply licence customers. The new water supply licensing regime is described in more detail in the section “Competition in the Water Industry - The Water Act” below.
Modification of a Licence Conditions of a licence may be modified in accordance with the procedures laid down in the WIA. Subject to a power of veto by the Secretary of State of certain proposed modifications, Ofwat may modify the conditions in the licence with the consent of the Regulated Company concerned. Before making the modifications, Ofwat must publish the proposed modifications as part of a consultation process, giving third parties the opportunity to make representations and objections which Ofwat must consider. In the absence of consent, the only means by which Ofwat can normally secure a modification is following a modification reference to the Competition Commission. A modification reference may also be required in the event of a direction from the Secretary of State to the effect that, among other things, in his view, the modifications should only be made, if at all, following a reference to the Competition Commission.
A modification reference requires the Competition Commission to investigate and report on whether matters specified in the reference operate, or may be expected to operate, against the public interest and, if so, whether the adverse public interest effect of those matters could be remedied or prevented by modification of the conditions of the licence. In determining whether any particular matter operates or may be expected to operate against the public interest, the Competition Commission is to have regard to the matters in relation to which duties are imposed on the Secretary of State and Ofwat.
If there is an adverse finding, the Competition Commission’s report will state whether any adverse effects on the public interest could be remedied or prevented by modification of the licence. If the Competition Commission so concludes, Ofwat must then make such modifications to the licence as appear to it necessary to remedy or prevent the adverse effects specified in the report whilst having regard to the modifications specified therein and after giving due notice and consideration to any representations and objections.
If it appears to the Competition Commission that the proposed modifications are not requisite for the purpose of remedying or preventing the adverse effects specified in its report, the Competition Commission has the power to substitute its own modifications which are requisite for the purpose.
Under the Water Act, Ofwat was also given power to modify the conditions of the licence insofar as it considered it necessary to do so to facilitate the new water supply licensing arrangements (see the section “Competition in the Water Industry - The Water Act” below), but this power could only be exercised within the first two years of the coming into force of the new provisions. That period has expired. Conditions R and S were introduced using this power following consultation with Regulated Companies and came into effect on 15 September 2005 (modifications to Condition R came into effect on 1 September 2007).
The Competition Commission (and the Secretary of State in certain circumstances) now also has, among others, the power to modify the conditions of the licence after an investigation under its merger or market investigation powers under the Enterprise Act if it is concluded that matters investigated in relation to water or wastewater services broadly were anti-competitive or, in certain circumstances, against the public interest.
Water Supply Each Regulated Company which is a water undertaker has a general duty as such to develop and maintain an efficient and economical system of water supply and to make arrangements in relation to the provision of water supplies within its appointed area. It also has specific supply duties, including a duty to comply with a
78
water main requisition provided certain conditions are met, duties to supply water for domestic purposes to premises within the appointed area which are connected to a water main and to connect new premises to a water main. These duties must be carried out, so far as reasonably possible, with the aim of furthering the conservation and enhancement of natural beauty and the conservation of flora, fauna and physical features of special interest, and of maintaining freedom of access to places of natural beauty, buildings, sites and objects of archaeological, architectural and historical interest and providing access and recreation to the public. In addition, it may be required in certain very limited circumstances to connect premises outside its appointed area to one of its water mains and to supply water to those premises. Each Regulated Company is under a duty to promote the efficient use of water by its customers.
Water supplied for domestic purposes or food production purposes must be wholesome at the time of supply, which entails compliance with the Water Supply Quality Regulations. In certain circumstances, the standards set in those regulations may be relaxed. Where standards or relaxed standards are not being met, the Secretary of State is under a duty to take enforcement action against the supplier. However, Regulated Companies may submit undertakings or apply for an authorised departure to the Secretary of State detailing steps designed to secure or facilitate compliance with those standards. The Secretary of State is not required to take enforcement action for breaches of the Water Quality Regulations if satisfied with the undertakings, or if satisfied that the breaches are of a trivial nature, or if general duties preclude taking enforcement action. The Secretary of State has stated that, except in certain very limited circumstances, it is unlikely that enforcement action will be taken against Regulated Companies which are complying with the terms of their undertakings. Under the WIA, it is a criminal offence for a Regulated Company to supply water which is unfit for human consumption.
Wastewater Services Each Regulated Company which is a sewerage undertaker has a general duty as such to provide, improve, extend and maintain a system of public sewers capable of draining its region effectively, and to make provision for the emptying of sewers and for dealing effectively with their contents. It also has specific sewerage duties, including a duty to comply with a sewer requisition provided certain conditions are met, a duty to provide sewers otherwise than by requisition, and a duty to permit private drains and sewers to be connected to its public sewers.
It is a criminal offence for a person to cause or knowingly permit any poisonous, noxious or polluting matter or trade or sewage effluent to enter controlled waters (including most rivers and other inland and coastal waters) other than in accordance with the terms of a discharge consent or with some other lawful authority. The principal prosecuting body is the EA, although third parties also have a right of prosecution.
The terms of discharge consents depend largely on the type of discharge and when the consents were granted. Within the scope of its powers and duties under the WRA, the EA has discretion as to the terms on which discharge consents are granted or existing consents are altered. The disposal of wastewater sludge from wastewater treatment works is also controlled.
Service Standards Ofwat makes annual assessments of the serviceability of Regulated Companies’ water and wastewater assets on the basis of data submitted in companies’ annual returns. Ofwat considers four asset categories (water infrastructure, water non-infrastructure, sewerage infrastructure and sewerage non-infrastructure) and assesses each against key performance measures to assess annually whether each category is “improving”, “stable”, “marginal” or “deteriorating”.
Regulated Companies are required to report to Ofwat on their performance against certain service standards, particularly service to customers, in respect of their obligations as water undertakers and sewerage undertakers. If they do not meet certain standards under Ofwat’s guaranteed standards scheme, they may be required to pay compensation to customers.
79
Under the Water Act, Regulated Companies have been required from 1 April 2005 to disclose whether or not they link the remuneration of their directors to levels of customer service attained and to give details of how any links affect remuneration.
Enforcement Powers The general duties of Regulated Companies as water or sewerage undertakers are enforceable by the Secretary of State or Ofwat or both. The conditions of the licence (and other duties) are enforceable by Ofwat alone whilst other duties, including those relating to water quality, are enforceable by the DWI.
Where the Secretary of State or Ofwat is satisfied that a Regulated Company is contravening, or has contravened and is likely to do so again, or is likely to contravene, its licence or a relevant statutory or other requirement, either the Secretary of State or Ofwat (whichever is the appropriate enforcement authority) must make a final enforcement order to secure compliance with that condition or requirement, save that, where it appears to the Secretary of State or Ofwat more appropriate to make a provisional enforcement order, he may do so. In determining whether a provisional enforcement order should be made, the Secretary of State or Ofwat shall have regard to the extent to which any person is likely to sustain loss or damage as a consequence of such breach before a final enforcement order is made. The Secretary of State or Ofwat will confirm a provisional enforcement order if satisfied that the provision made by the order is needed to ensure compliance with the condition or requirement that is in breach. There are exemptions from the Secretary of State’s and Ofwat’s duty to make an enforcement order or to confirm a provisional enforcement order:
– where the contraventions were, or the apprehended contraventions are, of a trivial nature;
– where the company has given, and is complying with, a Section 19 Undertaking to secure or facilitate compliance with the condition or requirement in question; or
– where duties in the WIA preclude the making or confirmation of the order.
Section 19 Undertakings create obligations that are capable of direct enforcement under section 18 of the WIA. Accordingly, the main implication of a Regulated Company assuming such an undertaking is that any future breach of the specific commitments contained in the undertaking is enforceable in its own right (without the need for further grounding on general statutory or licence provisions).
The WIA also confers powers on Ofwat or the Secretary of State to impose financial penalties on Regulated Companies and the new licensees introduced by the Water Act. Ofwat and the Secretary of State have the power to fine such a company up to 10 per cent. of its turnover if it fails to comply with its licence conditions, standards of performance or other obligations. The penalty must also be reasonable in all the circumstances. In 2007, Ofwat imposed a fine of £8.5 million on United Utilities for non-compliant trading arrangements with associate companies in breach of condition F of its licence. In February 2008, Ofwat fined Southern Water a total of £20.3 million for breaching Condition J and/or M of its licence in respect of regulatory reporting. In April 2008, Ofwat imposed a fine on Severn Trent Water of 3 per cent. of its turnover (£35.8 million) for breaching the same conditions of its licence. In that same month it also imposed a fine on Thames Water Utilities Limited of 0.7 per cent. of its turnover (£9.7 million), again for breaching the same conditions of its licence. In October 2008, Ofwat fined Tendring Hundred £42,000 for breaching condition M of its licence by submitting unreliable, inaccurate and incomplete information to Ofwat. The Water Act also provides for situations where a new licensee has caused or contributed to a breach of a Regulated Company’s licence or caused or contributed to a Regulated Company contravening a statutory or other requirement, or where a Regulated Company has caused or contributed to the breach of a new licensee’s licence or caused or contributed to the breach of the latter’s statutory or other requirements. In those cases, Ofwat may impose an appropriate remedy. A Regulated Company may appeal a penalty order to the court (the “Court”). The Court may cancel or reduce the penalty or extend the time-scale to pay. The requirement to pay the penalty is suspended until the case is determined. A financial penalty may not be imposed under this provision for an infringement if it is more appropriate to proceed under the Competition Act.
80
Special Administration Orders The WIA contains provisions enabling the Secretary of State, or Ofwat with the consent of the Secretary of State, to secure the general continuity of water supply and wastewater services. In certain specified circumstances, the Court may, on the application of the Secretary of State or, with his consent, Ofwat, make a Special Administration Order in relation to a Regulated Company and appoint a Special Administrator. These circumstances include:
– where there has been, or is likely to be, a breach by a Regulated Company of its principal duties to supply water or provide wastewater services or of a final or confirmed provisional enforcement order and, in either case, the breach is serious enough to make it inappropriate for the Regulated Company to continue to hold its licence;
– where the Regulated Company is, or is likely to be, unable to pay its debts;
– where, in a case in which the Secretary of State has certified that it would be appropriate, but for section 25 of the WIA, for him to petition for the winding-up of the Regulated Company under section 124 of the Insolvency Act, it would be just and equitable, as mentioned in that section, for the Regulated Company to be wound up if it did not hold a licence; and
– where the Regulated Company is unable or unwilling to adequately participate in arrangements certified by the Secretary of State or Ofwat to be necessary by reason of, or in connection with, the appointment of a new Regulated Company upon termination of the existing Regulated Company’s licence.
In addition, on an application being made to Court, whether by the Regulated Company itself or by its directors, creditors or contributories, for the compulsory winding-up of the Regulated Company, the Court would not be entitled to make a winding-up order. However, if satisfied that it would be appropriate to make such an order if the Regulated Company were not a company holding a licence, the Court shall instead make a Special Administration Order.
During the period beginning with the presentation of the petition for Special Administration and ending with the making of a Special Administration Order or the dismissal of the petition (the “Special Administration Petition Period”), the Regulated Company may not be wound up, no steps may be taken to enforce any security except with the leave of the Court and, subject to such terms as the Court may impose, no other proceedings or other legal process may be commenced or continued against the Regulated Company or its property except with the leave of the Court.
Once a Special Administration Order has been made, any petition presented for the winding-up of the company will be dismissed and any receiver appointed, removed. Whilst a Special Administration Order is in force, those restrictions imposed during the Special Administration Petition Period continue with some modifications: an administrative receiver can no longer be appointed (with or without the leave of the Court) and, in the case of certain actions which require the Court’s leave, the consent of the Special Administrator is acceptable in its place. See the section “Restrictions on the Enforcement of Security” below.
A Special Administrator has extensive powers similar to those of an administrator under the Insolvency Act, but with certain important differences. He is appointed only for the purposes of transferring to one or more different Regulated Companies as much of the business of the Regulated Company as is necessary for the proper carrying out of its water supply or sewerage functions as the case may be and, pending the transfer, of carrying out those functions. During the period of the order, the Regulated Company is managed for the achievement of the purposes of the order and in a manner which protects the respective interests of members and creditors. However, the effect of other provisions of the WIA is ultimately to subordinate members’ and creditors’ rights to the achievement of the purposes of the Special Administration Order.
Were a Special Administration Order to be made, it is for the Special Administrator to agree the terms of the transfer on behalf of the existing appointee, subject to the provisions of the WIA. The Transfer Scheme may
81
provide for the transfer of the property, rights and liabilities of the existing Regulated Company to the new Regulated Company(ies) and may also provide for the transfer of the existing Regulated Company’s licence (with modifications as set out in the Transfer Scheme) to the new Regulated Company(ies). The powers of a Special Administrator include, as part of a Transfer Scheme, the ability to make modifications to the licence of the existing Regulated Company, subject to the approval of the Secretary of State or Ofwat, as well as the power to exercise any right the Regulated Company may have to seek a review by Ofwat of the Regulated Company’s charges pursuant to an IDOK or a Shipwreck Clause. To take effect, the Transfer Scheme must be approved by the Secretary of State or Ofwat. In addition, the Secretary of State and Ofwat may modify a Transfer Scheme before approving it or at any time afterwards with the consent of the Special Administrator and each new Regulated Company.
The WIA also grants the Secretary of State, with the approval of the Treasury, the power: (i) to make appropriate grants or loans to achieve the purposes of the Special Administration Order and to indemnify the Special Administrator against losses or damages sustained in connection with the carrying out of his functions; and (ii) to guarantee the payment of principal or interest and the discharge of any other financial obligations in connection with any borrowings of the Regulated Company subject to a Special Administration Order.
Protected Land Under the WIA, there is a prohibition on Regulated Companies disposing of any of their Protected Land except with the specific consent of, or in accordance with a general authorisation given by, the Secretary of State. A consent or authorisation may be given on such conditions as the Secretary of State considers appropriate. For the purpose of these provisions, disposal includes the creation of any interest (including leases, licences, mortgages, easements and wayleaves) in or any right over land, and includes the creation of a charge. All land disposals are reported to Ofwat in the annual return.
Protected Land comprises any land, or any interest or right in or over any land, which:
– was transferred to a water and sewerage company (under the provisions of the Water Act 1989) on 1 September 1989, or was held by a water only company at any time during the financial year 1989/90;
– is, or has at any time on or after 1 September 1989, been held by a company for purposes connected with the carrying out of its regulated water or wastewater functions; or
– has been transferred to a company in accordance with a scheme under Schedule 2 to the WIA from another company, in relation to which the land was Protected Land when the transferring company held an appointment as a water or sewerage undertaker.
Unless a specific consent is obtained from the Secretary of State, all disposals of Protected Land must comply with condition K of the licence. This condition seeks to ensure (i) that, in disposing of Protected Land, the Regulated Company retains sufficient rights and assets to enable a Special Administrator to manage the business, affairs and property of the Regulated Company so that the purposes of the Special Administration Order can be achieved and (ii) that the best price is received from such disposals so as to secure benefits to customers (where such proceeds were not taken into account when price limits were set, they are shared equally as between customers and shareholders). To this end there are certain procedures for and restrictions on the disposal of Protected Land and special rules apply to disposals by auction or formal tender and to disposals to certain associated companies. These include a restriction on the disposal (except with the consent of Ofwat) of Protected Land required for carrying out the Appointed Business. In addition, Ofwat can impose conditions on disposals of Protected Land including conditions relating to the manner in which the proceeds of a sale are to be used.
Given the purposes of the WIA (in particular of the Special Administration regime and the restrictions on enforcement of security thereunder) and of condition K of its licence, a Regulated Company would not expect to obtain the consent of the Secretary of State or Ofwat to the creation of any security over its Protected Land.
82
Security
Restrictions on the Granting of Security A Regulated Company’s ability to grant security over its assets and the enforcement of such security are restricted by the provisions of the WIA and its licence. For example, the WIA restricts a Regulated Company’s ability to dispose of Protected Land (as explained in the section “Protected Land” above). Accordingly, a licence restricts a Regulated Company’s ability to create a charge or mortgage over Protected Land. In the case of SWS, management believes that the vast majority of SWS’ assets by value is tangible property which is Protected Land and cannot therefore be effectively secured.
In addition, provisions in a Regulated Company’s licence require the Regulated Company at all times:
(a) to ensure, so far as is reasonably practicable, that if a Special Administration Order were made in respect of it, it would have sufficient rights and assets (other than financial resources) to enable the Special Administrator to manage its affairs, business and property so that the purpose of such an order could be achieved; and
(b) to act in the manner best calculated to ensure that it has adequate: (a) financial resources and facilities; and (b) management resources, to enable it to carry out its regulated activities.
These provisions further limit the ability of a Regulated Company to grant security over its assets, in particular assets required for carrying out the Appointed Business, and limit in practice the ability to enforce such security.
Restrictions on the Enforcement of Security Under the WIA, the enforcement of security given by a Regulated Company in respect of its assets is prohibited unless the person enforcing the security has first given 14 days’ notice to both the Secretary of State and Ofwat. If a petition for Special Administration has been presented, leave of the Court is required before such security is enforceable or any administrative receiver can be appointed (or, if an administrative receiver has been appointed between the expiry of the required notice period and presentation of the petition, before the administrative receiver can continue to carry out his functions). These restrictions continue once a Special Administration Order is in force with some modification (see the section “Special Administration Orders” above).
Once a Special Administrator has been appointed, he would have the power, without requiring the Court’s consent, to deal with property charged pursuant to a floating charge as if it were not so charged. When such property is disposed of under this power, the proceeds of the disposal would, however, be treated as if subject to a floating charge which had the same priority as that afforded by the original floating charge.
A disposal by the Special Administrator of any property secured by a fixed charge given by the Regulated Company could be made only under an order of the Court unless the creditor in respect of whom such security is granted otherwise agreed to such disposal. Such an order could be made if, following an application by the Special Administrator, the Court was satisfied that the disposal would be likely to promote one or more of the purposes for which the order was made (although the Special Administrator is subject to the general duty to manage the company in a manner which protects the respective interests of the creditors and members of the Regulated Company). Upon such disposal, the proceeds to which that creditor would be entitled would be determined by reference to the “best price which is reasonably available on a sale which is consistent with the purposes of the Special Administration Order” as opposed to an amount not less than “open market value” which would apply in a conventional administration for a non-Regulated Company under the Insolvency Act.
83
Within three months of the making of a Special Administration Order or such longer period as the Court may allow, the Special Administrator must send a copy of his proposals for achieving the purposes of the order to, among other persons, the Secretary of State, Ofwat and the creditors of the company. The creditors’ approval of the Special Administrator’s proposal is not required at any specially convened meeting (unlike in the conduct of a conventional administration under, the Insolvency Act). The interests of creditors and members in a Special Administration are still capable of being protected since they have the right to apply to the Court if they consider that their interests are being prejudiced. Such an application may be made by the creditors or members by petition for an order on a number of grounds, including either: (i) that the Regulated Company’s affairs, business and property are being or have been managed by the Special Administrator in a manner which is unfairly prejudicial to the interests of its creditors or members; or (ii) that any actual or proposed act of the Special Administrator is or would be so prejudicial. Except as mentioned below, the Court may make such order as it thinks fit, and any order made by the Court may include an order to require the Special Administrator to refrain from doing or continuing an act about which there has been a complaint. The exception referred to above is that the Court may not make an order which would prejudice or prevent the achievement of the purposes of the Special Administration Order.
Enforcement of Security over Shares in Regulated Companies Under the WIA, the enforcement of security over, and the subsequent sale of, directly or indirectly, the shares in a Regulated Company would not be subject to the restrictions described above in relation to the security over a Regulated Company’s business and assets. Notwithstanding this, given Ofwat’s general duties under the WIA to exercise and perform its powers and duties, among other things, to ensure that the functions of a Regulated Company are properly carried out, the expectation is that any intended enforcement either directly or indirectly of security over, and subsequently any planned disposal of, the shares in a Regulated Company to a third party purchaser would require consultation with Ofwat. In addition, depending on the circumstances, the merger control provisions referred to in the section “Merger Regime” below could apply in respect of any such disposal.
Economic Regulation
General Economic regulation of the water industry in England and Wales is based on a system of five-year price caps (determined by the Periodic Reviews) imposed on the amounts Regulated Companies can charge to their customers. This is intended to reward companies for efficiency and quality of service to customers. The system was intended generally to allow companies to retain for a period any savings attributable to efficiency, thus creating incentives to make such gains.
K Price Limitation Formula The main instrument of economic regulation is the price limits set out in the conditions of the licences. These limit increases in a basket of standard charges made by Regulated Companies for water supply and wastewater services. The weighted average charges increase is limited to the sum of the percentage movement in the RPI plus K, a company specific adjustment factor. The size of a Regulated Company’s K factor (which can be positive, negative or zero) reflects the scale of its capital investment programme, its cost of capital as determined by Ofwat, and its operational and environmental obligations, together with Ofwat’s judgment as to the scope for it to improve its efficiency. As such, it may be a different number in different years.
Regulatory Capital Value Under the methodology developed by Ofwat, the regulatory capital value of Regulated Companies is a critical parameter underlying price limits set at Periodic Reviews, being the value of the capital base of the relevant Regulated Company for the purposes of calculating the return on capital element of the determination of K. The value of the regulatory capital value to investors and lenders is protected against inflation by adjusting the value each year by RPI. In addition, Ofwat’s projections of regulatory capital value take account of the
84
assumed net capital expenditure in each year of a Periodic Review Period. For these purposes, Ofwat make an assumption regarding the relationship between movements in RPI and movements in the Construction Output Prices Index (“COPI”). At the 2009 Periodic Review SWS’ RCV will again be adjusted by, amongst other things, substituting the actual movement in COPI for that assumed in 2004.
Price Control A small number of mainly large consumption non-domestic customers are charged in accordance either with individual “special” arrangements or with standard charges which do not fall within the scope of the tariff basket. These include charges for bulk supplies and charges in respect of infrastructure provision and, where these are not in accordance with standard charges, charges for non-domestic supplies of water and the reception, treatment and disposal of trade effluent. Charges for bulk supplies of water are usually determined on an individual basis, as are charges for some larger non-domestic water supplies and some trade effluent. The charging basis for bulk supplies in some cases provides for annual recalculation by reference to the expenditure associated with the supply. In May 2007 Ofwat published its Water and Sewerage Charges Report for 2007/08, in which it set out its policy on tariff issues and the approach to be taken in assessing and approving Regulated Companies’ charge schemes, including its expectation that customers’ bills should broadly reflect the cost of the service provided.
Periodic Reviews of K K factors are currently re-determined by Periodic Review every five years. Ofwat published the Final Determination of future water and wastewater charges for the 2004 Periodic Review on 2 December 2004 and these came into effect on 1 April 2005. The industry average price limit for 2008-09 is 2.5 per cent. Following the last Periodic Review, new price limits took effect from 1 April 2005 and were set for the AMP4 Period.
In January 2006, Ofwat published a consultation document entitled “Setting water and sewerage price limits: Is five years right?”. Ofwat has since stated that, in 2009, prices will again be set for five years.
Ofwat initiated its 2009 Periodic Review of price limits in March 2008, when it published “Setting price limits for 2010-15: Framework and approach”. Its approach differs to that taken by Ofwat with regard to the 2004 Periodic Review as follows:
(i) On 5 April 2007 Ofwat issued an open letter to Managing Directors of all Regulated Companies setting out expectations for a Strategic Direction Statement that each company was to provide by 14 December 2007. The Strategic Direction Statements set out the long-term strategy of the company for consumers, regulators and other stakeholders. The statements were to have included the following: the company’s plan to deliver for consumers and the environment in the long term (i.e. at least 25 years ahead); the impact this has on the management and stewardship of assets, and innovation; the company’s approach to issues such as climate change and sustainability; the company’s consumers’ priorities; the objectives of the company’s long-term charging strategy, how the company plans to achieve its charging strategy and the implications for bills; major risks and how these will be managed; and how the strategy will be financed by the company; and
(ii) Ofwat now requires Regulated Companies to submit draft and final business plans for the period 2010–15 including a 25-year forward-looking strategy. Regulated Companies are challenged to produce investment plans that are clearly part of a long-term cost-beneficial plan for consumers and the environment.
Each Regulated Company submitted its draft business plan (setting out how its strategy will be financed) on 11 August 2008 with final business plans to be submitted in April 2009. Ofwat will release a draft determination setting draft price limits in July 2009. The final determination setting final price limits will be issued in November 2009.
85
Interim Determinations of K Condition B of a Regulated Company’s licence provides for Ofwat to determine in certain circumstances whether, and if so how, K should be changed between Periodic Reviews. The procedure for an IDOK can be initiated either by the Regulated Company or by Ofwat. An application for an IDOK may be made in respect of a Notified Item, a Relevant Change of Circumstance or where there has been a substantial adverse or favourable effect on the delivery of regulatory outputs.
A Notified Item is any item formally notified by Ofwat to the Regulated Company as not having been allowed for (either in full or at all) in K, provided that there has been no Periodic Review subsequent to that notification. Notified Items put forward by Ofwat in the determination of price limits for the Regulated Companies in the AMP4 Period are: (i) the costs and revenues associated with any difference in the number of domestic customers who opt to switch to measured charges from that assumed by Ofwat; (ii) any net increase in bad debt and debt collection costs compared to 2003/04 arising from, in particular, the loss of power to disconnect residential customers for non-payment from 1 April 2000; (iii) costs arising as a result of the implementation of new legislation relating to lane rental or other charges payable to highway authorities for occupying the highway (e.g. the Traffic Management Act 2004); (iv) changes in the charges made by the EA for water abstraction and discharges of treated effluent; and (v) changes in taxation on infrastructure expenditure arising from the introduction of International Financial Reporting Standards or any FRS based on Financial Reporting Exposure Draft (FRED) 29.
Relevant Changes of Circumstance are defined in the licences. Such changes include: (i) the application to the Regulated Company of any new or changed legal requirement including any legal requirement ceasing to apply, being withdrawn or not being renewed (to the extent that the legal requirement applies to the Regulated Company in its capacity as a water or wastewater undertaker); (ii) any difference in value between actual or anticipated proceeds of disposals of Protected Land and those allowed for at the last Periodic Review or IDOK; and (iii) where, on a determination of K, allowance has been made for taking steps to secure compliance or facilitate compliance with a legal requirement or achieve a service standard and the Regulated Company has failed to take those steps and (a) as a result, failed to spend the full amount which it was assumed would be spent taking into account savings which may have been achieved by prudent management and (b) the stated purpose has not otherwise been achieved.
An IDOK takes account of the costs, receipts and savings to be included in the computation of K which are reasonably attributable to the Notified Items or the Relevant Changes of Circumstance in question and are not recoverable by charges outside the K price limitation formula. The amount and timing of the costs, receipts and savings must be appropriate and reasonable for the Regulated Company in all the circumstances and they must exclude trivial amounts, any costs which would have been avoided by prudent management action, any savings achieved by management action over and above those which would have been achieved by prudent management action, and any amounts previously allowed for in determining K. These costs are then netted off against the receipts and savings to determine the annual cash flows thereof for each year included in the period over which the costs are to be measured (“Base Cash Flows”).
The conditions of the licences also specify a materiality threshold which must be reached before any adjustment can be made. In relation to certain licences this materiality threshold is reached where the sum of the net present values of (i) Base Cash Flows consisting of operating expenditure and/or loss of revenue calculated over 15 years and (ii) other Base Cash Flows calculated over the period to the next Periodic Review, is equal to at least 10 per cent. of the latest reported turnover attributable to the Regulated Company’s water and wastewater business. An adjustment to K (which may be up or down) is then calculated on the basis of a formula broadly designed to enable the Regulated Company to recover the additional allowable costs incurred or to be incurred during the period until the start of the first charging year to which the next Periodic Review applies and attributable to the identified Base Cash Flows. The change is then made for the remainder of the period up to the start of that first charging year. Condition B of the licence sets out in detail the step-by- step methodology which Ofwat is required to apply.
86
In addition, under the Shipwreck Clause in the licence of a Regulated Company, the Regulated Company or Ofwat is permitted to request price limits to be reset if its Appointed Business either: (i) suffers a substantial adverse effect which could not have been avoided by prudent management action; or (ii) enjoys a substantial favourable effect which is fortuitous and not attributable to prudent management action. For this purpose, the financial impact is calculated in the same way as for the materiality threshold above except that the 10 per cent. threshold is replaced by a 20 per cent. threshold. Since Ofwat’s open letter of 31 January 2001 to the Managing Directors of Regulated Companies offering to reinsert the clause in their licences, several other Regulated Companies have accepted the proposed inclusion of a Shipwreck Clause in their licences and Ofwat has modified their licences accordingly.
References to the Competition Commission If Ofwat fails within specified periods to make a determination at a Periodic Review or in respect of an IDOK or if the Regulated Company disputes its determination, the Regulated Company may require Ofwat to refer the matter to the Competition Commission for determination by it after making an investigation. The Competition Commission must make its determination in accordance with any regulations made by the Secretary of State and with the principles which apply, by virtue of the WIA, in relation to determinations made by Ofwat. The decisions of the Competition Commission are binding on Ofwat. No Regulated Company chose to dispute the 2004 Final Determination.
Other Restrictions on Charging Under the WIA, Regulated Companies must charge for water supplied, or wastewater services provided, to dwellings in accordance with a charges scheme which cannot take effect unless approved by Ofwat and must comply with any requirements prescribed by the Secretary of State by regulations. Regulated Companies are prohibited from disconnecting dwellings and certain other premises for non-payment of charges for water supply.
The Walker Review of charging for household water and sewerage services In February 2008 DEFRA launched an independent review of charging for household water and sewerage services (“Walker Review”). The Walker Review, announced in “Future Water – the Government’s Water Strategy for England” published on 7 February includes the examination of the current system of charging for households for water and sewerage services in response to the more acute pressure on supply and demand, a greater awareness of wider environmental impacts and the increasing concerns about fairness and affordability in the existing system. It will include consideration of social, economic and environmental concerns and will make recommendations which could include changes to current legislation and guidance. On 14 November 2008 the Walker Review published a call for evidence and responses were required by 19 December 2008. An interim report for consultation is likely to be published in Spring 2009 with the final report being published later in the year.
Drinking Water and Environmental Regulation
EU Law Generally The activities of Regulated Companies are affected by the requirements of EU Directives. Principal EU Directives relating to such activities which are currently in force or are proposed are detailed below. It should be noted that many of the EU Directives which outline standards for the aquatic environment and therefore affect Regulated Companies have cyclical review cycles, usually of four to six years. The application and interpretation of these EU Directives by the EA and DEFRA also remain under review. Investment consequences for Regulated Companies of either EU wide or UK focused reviews are taken into account in the Periodic Review process.
The investment consequences for AMP5 of the Directives listed below have been discussed and agreed with the EA as part of the 2010-15 Periodic Review process. Further details of these have been outlined in the Draft Business Plan and Ofwat has shared elements of the Draft Business Plan with the EA.
87
Water Framework Directive Directive 2000/60/EC establishing a framework for community action in the field of water policy (“Water Framework Directive”) was adopted in 2000. It is intended to rationalise existing EU water legislation in order to provide a framework for the protection and improvement of ground, inland and coastal waters from hazardous substances and to promote sustainable water consumption. The Water Framework Directive was transposed into English and Welsh law by the Water Environment (Water Framework Directive) (England and Wales) Regulations 2003 which came into force on 2 January 2004. The Directive is set out over three “six year” cycles, the first of which commences in December 2009 with the publication of River Basin Management plans. These plans will include lists of measures that Regulated Companies and other parties will need to undertake to achieve the objectives of the Water Framework Directive. Such measures are in the process of being agreed with the EA through the Periodic Review process for 2010 – 2015. It is expected to have a significant impact on Regulated Companies in the longer term, particularly post-2015. For example, it may result in increased limitations on abstraction licences and the tightening of discharge consents, which could cause Regulated Companies to incur material expenditure. To comply with the Water Framework Directive, Member States will have to ensure all their waters achieve at least “good status” by 2015, or set out alternative standards and/or a timetable for the achievement of these by no later than 2027.
It is noteworthy that many of the investments driven by the Water Framework Directive will also increase the level of carbon emissions of Regulated Companies. Targets set by the Government in this regard will need to be addressed by other means which are likely to incur additional costs.
On 17 June 2008, the European Parliament and Council reached agreement on the text for a new directive on environmental quality standards for water. This new directive entered into force on 13 January 2009 and must be transposed into UK law by July 2010 under the umbrella of the Water Framework Directive. The directive replaces five existing directives, and sets harmonised quality standards for “priority” substances (those which are most harmful to the aquatic environment, such as mercury), thereby translating the concept of “good status” into transparent numerical values. A programme of investment for the AMP5 Period has been agreed with the EA and is detailed in the Draft Business Plan which has been submitted to Ofwat. This programme will set out the further environmental monitoring that Regulated Companies must undertake. These studies will inform what, if any, material investment could follow in AMP6 to ensure compliance with the Water Framework Directive.
Groundwater Directive A new groundwater directive (the “Groundwater Directive”) was adopted in December 2006 which is the first “daughter” directive to the Water Framework Directive providing further detail on how the objectives of the Water Framework Directive are to be achieved with respect to groundwater. Under the Groundwater Directive, Member States are required to monitor and assess groundwater quality on the basis of common criteria and to identify and reverse trends in groundwater pollution. If groundwater quality is improved, Regulated Companies may benefit from reduced costs in cleaning abstracted water. However, there is also a possibility that Regulated Companies may have to bear part of the costs of complying with this new Directive. Member States had until 16 January 2009 to bring into force laws, regulations and administrative provisions to implement the new Directive. The implementation of the Groundwater Directive into UK law is currently under discussion. The UK carried out a consultation on the proposals for implementation of Article 6 of the Directive (relating to measures to prevent or limit inputs of pollutants into groundwater), which closed on 20 August 2008. It is therefore difficult at present to determine what, if any, the likely impact would be on Regulated Companies. However, new regulations to transpose Article 6 are not expected to enter into force until Spring 2009. Each of the proposals put forward by the Government will generate compliance costs to meet the requirements to protect, enhance and restore groundwater bodies and to reverse significant upward trends of pollutants. Regulated Companies are likely to bear some such compliance costs through measures to reduce leakage from sewers.
88
Whilst it is anticipated that Regulated Companies will seek to include any expenditure required to comply with the Groundwater Directive in their respective investment programmes, it is not possible to predict the degree to which this will be allowed for by Ofwat. However, according to DEFRA the impact of the proposed amendments on Regulated Companies should be minimal and the overall costs are expected to be neutral.
Urban Waste Water Treatment Directive The Urban Waste Water Treatment Directive (91/271/EEC) (“UWWTD”) relates to the collection, treatment and discharge of urban wastewater. The UWWTD lays down minimum requirements for the treatment of municipal wastewater and for the disposal of sewage sludges which arise from the treatment process and aims to control the discharge of industrial wastewaters. Receiving waters are classified according to their “sensitivity” to nutrient enrichment, with “sensitive” waters being subject to more stringent treatment requirements. The European Commission has commenced infraction proceedings against the United Kingdom, alleging that it has failed to implement the UWWTD correctly by inaccurately designating “sensitive” waters. The case has been referred to the ECJ and is awaiting hearing, scheduled for 5 March 2009, and judgment which is expected in the Spring or early Summer of 2009. Depending on the outcome of the infraction proceedings, Regulated Companies may be required to make material investment in further treatment processes which would in due course be funded through the normal Ofwat price setting mechanism.
If the ECJ finds against the UK, SWS would be required to set up nitrogen removal plants for discharges by wastewater treatment works to the Thames Estuary and phosphorous removal plants for discharges by wastewater treatment works to Southampton Water.
The UWWTD has been transposed into UK legislation by the Urban Waste Water Treatment Regulations 1994 (as amended) as further described below (“Discharge into Controlled Water”).
Bathing Waters Directive On 12 October 2005, the European Parliament and Council reached agreement on the scope of a new Bathing Waters Directive (2006/7/EC). This new directive was adopted and published early in 2006 and has now been transposed into UK law by the Bathing Water Regulations 2008, which came into force on 14 May 2008.
The main objective of this directive is to improve public health protection, while taking account of changes in science and technology and bathing water management since the original 1976 Directive was adopted. The revised directive sets four new standards of water quality (excellent, good, sufficient and poor) and all bathing waters shall be expected to achieve at least the “sufficient” classification by 2015, with limited exceptions. Key aspects of the new directive include an obligation to meet a much tighter minimum bathing water quality standard, rationalisation of the water quality parameters to be monitored, new rules for the frequency of sampling and improved provision of information to the public concerning bathing water quality.
Water Quality Directive The EU’s Directive on the Quality of Water intended for Human Consumption (98/83/EC) (the “Drinking Water Directive”) sets standards for water intended for drinking, food preparation or other domestic purposes and has been implemented by the Water Quality Regulations, which came into force in full on 1 January 2004. The Water Quality Regulations were amended in 2007 introducing the requirement for wider catchment risk assessments and a Drinking Water Safety Plan (“DWSP”) approach to safeguarding the quality of drinking water supplies. A revision to the Drinking Water Directive is also being considered to bring a DWSP approach to European legislation.
Habitats and Birds Directives Directive 92/43/EEC on the conservation of natural habitats and wild flora and fauna (“Habitats Directive”) and Directive 79/409/EEC on the conservation of wild birds (“Birds Directive”) establish a network of areas protected by designation across Europe called “Natura 2000” to conserve endangered habitats classified as special protection areas (“SPA”) under the Birds Directive and Special Areas of Conservation (“SAC”) under the Habitats Directive. Once a site is designated, Member States must take steps to avoid the deterioration of
89
habitats and disturbance of species. This has involved a review of any existing abstraction discharge consents that are likely to impact upon a protected area. Regulated Companies are likely to have sites located within or adjacent to SPAs or SACs, which could materially affect operations and the ability to abstract water in or adjacent to such designated areas. The designation of SPAs and SACs, pursuant to the Habitats Directive, may negatively impact upon a Regulated Company’s plans for future sites or operations. This risk is significantly increased by the effects of climate change, such as the increasing risk of drought.
Environmental Liability Directive In April 2004, a European Directive (2004/35/EEC) on “environmental liability with regard to the prevention and remedying of environmental damage” (the “Environmental Liability Directive”) came into effect, which aims to both prevent and remedy environmental damage, including water pollution, damage to biodiversity and land contamination which causes serious harm to human health. Under the Environmental Liability Directive, operators responsible for certain prescribed activities (for example, those which are subject to the PPC Regime) and which cause environmental damage would, subject to certain defences, be held strictly liable for restoring the damage caused or made to pay for the restoration. All other operators who cause damage to biodiversity by fault or negligence will be under an obligation to repair the damage. Member States had until 30 April 2007 to implement the Environmental Liability Directive into national law, which was completed in the UK with the enactment of the Environmental Damage (Prevention and Remediation) Regulations 2009 which are due to come into force on 1 March 2009. Although liability under the Environmental Liability Directive will not be retrospective, the Environmental Liability Directive may well have a significant impact on Regulated Companies whose operations cause damage to the environment and biodiversity that goes beyond damage already covered by existing statutory regimes. In the Government’s most recent consultation on implementation of the Environmental Liability Directive which closed on 27 May 2008, the Government put forward some changes to its previous proposals but maintained its intention not to go beyond the minimum requirements of the Directive unless there are exceptional circumstances justified by a cost benefit analysis and following extensive stakeholder engagement.
Strategic Environmental Assessment Directive Directive 2001/42/EC on the assessment of the effects of certain plans and programmes (“SEA Directive”) states that its objective is “to provide for a high level of protection of the environment and to contribute to the integration of environmental considerations into the preparation and adoption of plans and programmes with a view to promoting sustainable development”. The SEA Directive has been transposed in England by the Environmental Assessment of Plans and Programmes Regulations 2004, which came into force on 20 July 2004. It requires an “environmental assessment” of certain plans and programmes. The SEA Directive defines “environmental assessment” as a procedure comprising:
(i) preparing an Environmental Report on the likely significant effects of the draft plan or programme;
(ii) carrying out consultation on the draft plan or programme and the accompanying Environmental Report;
(iii) taking into account the Environmental Report and the results of consultation in decision making; and
(iv) providing information when the plan or programme is adopted and showing how the results of the environmental assessment have been taken into account.
Water Resources Plans may fall within the scope of the SEA Directive, if their preparation began on or after 21 July 2004. This means that affected Regulated Companies may have to prepare a report on the likely significant environmental effects of their plans, consult environmental authorities and the public, and take the report and the results of the consultation into account during the plan preparation process and before the plan is adopted. A strategic environmental assessment has been undertaken on SWS’s draft WRMP published in April 2008 for consultation. The strategic environmental assessment will be updated in line with the final WRMP to be published in December 2009.
90
Pollution Prevention and Control and Sludge Directive The EC Integrated Pollution Prevention and Control Directive (96/61/EC) (the “IPPC Directive”) establishes the integrated Pollution Prevention and Control Regime (“PPC Regime”), which aims to achieve a high level of protection of the environment as a whole by providing an integrated approach to pollution control. Under the PPC Regime, there is a basic prohibition on operating certain prescribed industrial “installations” except under, and to the extent authorised by, a PPC permit. The Commission launched a review of the IPPC Directive in November 2005 which culminated in the publication on 21 December 2007 of the Commission’s proposal for a Directive on industrial emissions (integrated pollution, prevention and control) (recast), which proposes to consolidate seven existing Directives regarding industrial emissions including the Waste Incineration Directive (2000/76/EC) and includes a number of changes regarding new and existing activities.
Recycling treated sludge to agricultural land as a fertiliser and soil conditioner is the major outlet for this material. Current controls of this activity are based on the EU Directive on the Protection of the Environment, and, in particular, of the Soil, when Sewage Sludge is used in Agriculture (86/278/EEC) (as amended) (the “Sludge Directive”). Among other things, the Sludge Directive sets out limits for concentrations of heavy metals and prohibits the use of sludge on certain crops.
Incineration of sewage sludge with energy recovery is regulated under the PPC Regime and certain permit conditions applying to incineration are set in accordance with the Waste Incineration Directive (2000/76/EC) (implemented through the permitting requirements of the Environmental Permitting Regulations 2007, which came into force on 6 April 2008 to replace the previous PPC Regulations and the Waste Incineration Regulations 2002).
The EA continues to attempt to simplify and rationalise the regulatory regime, including that pertaining to the PPC Regime. These ‘better regulation’ initiatives are transferring responsibility from the EA for the monitoring of the environment to Regulated Companies.
REACH A new EU Regulation on chemicals and their safe use (EC 1907/2006) concerning the registration, evaluation, authorisation and restriction of chemicals (“REACH”) came into force on 1 June 2007. It places responsibility on the industry to manage the risks posed by chemicals to human health and the environment. The registration provisions under REACH will be phased in over an 11-year period, but to take advantage of the phased-in registration deadlines, manufacturers or importers of chemicals were required to pre-register the relevant substances by 1 December 2008. A failure to pre-register a substance as required with the European Chemicals Agency will mean that the substance cannot be manufactured, imported or put on the EU market until the full registration process is completed. Downstream users of chemicals have an obligation under REACH to ensure that suppliers are aware of the uses and exposure scenarios relating to their business and ensure that these are reflected in safety data sheets and registration dossiers.
REACH may impact upon the compliance costs of Regulated Companies, which are likely to be downstream users of chemicals, even if they do not have registration obligations as manufacturers or importers.
SWS has assessed all of its on-site chemical “production” processes and determined whether it was required to pre-register under REACH by 1 December 2008. All of SWS’s processes were either not captured by REACH or are exempt. SWS has written to all of its major chemical suppliers requesting details of their pre- registration process.
United Kingdom Law Generally The water industry is subject to numerous regulatory requirements concerning human health and safety and the protection of the environment.
91
Abstraction Licensing Under the WRA, water abstractions must be carried out in accordance with a licence granted by the EA. It is a criminal offence to abstract water without a licence or in breach of the conditions of an abstraction licence. The maximum penalty is an unlimited fine. The Water Act amends the abstraction licensing system in England and Wales to ensure the sustainable use of water. The EA may revoke abstraction licences in the interests of environmental protection where a licence has not been used for four years. No compensation would be available for any loss suffered as a consequence of any such amendment or revocation. The Government has said that it expects all abstractors to work with the EA to ensure that any environmentally damaging abstractions are replaced with sustainable alternatives before this provision comes into effect. Existing abstraction licences may be revoked or varied where the Secretary of State believes that revocation or variation is necessary to protect any waters or underground strata, or any flora and fauna dependent on them, from serious damage and from 15 July 2012 such variations and revocations can be made without compensation being payable. Also included in the Water Act is a provision requiring all new abstraction licences to be time-limited (and the Government has previously indicated that it expects most existing licences to be converted to a time-limited basis over time) and a provision creating a new right for third parties to claim damages against an abstractor for loss or damage due to water abstraction. Any new licence with a duration of more than 12 years must contain a “curtailment condition” which allows the EA to give the licence holder 6 years’ notice of the abstraction licence changing to a lower authorised quantity without compensation being paid.
Changes to the charges levied by the EA in connection with abstraction licences for 2008-2009 became effective from 1 April 2008, arising from compensation payments for environmental improvements under the Restoring Sustainable Abstraction programme. Ofwat has recognised that the new charging scheme has the potential to increase charges to Regulated Companies and is considering proposals that some of the increase in charges will be recoverable from customers.
In April 2001, the EA launched the Catchment Abstraction Management Strategies (“CAMS”) process which is a part of the Government’s plans to reform water resources licensing. For the purposes of managing water resources, the EA has divided England and Wales into catchment areas and has formulated a local strategy for each catchment area based upon sustainable use of water resources. The strategy gives details of the water resource availability in the catchment area and informs the EA’s abstraction licensing policies for that area. CAMS are also the vehicle for reviewing time-limited abstraction licences and determining whether and on what terms they should be renewed.
If an abstraction licence potentially affects a site designated under the Conservation (Natural Habitats &c.) Regulations 1994 (as amended), the licence must be reviewed in accordance with those Regulations, a process called “appropriate assessment”. The EA is currently reviewing all licences including abstraction licences for this purpose in a process known as the “Review of Consents”. All reviews must be completed by 2010. The modification or revocation of abstraction licences allows for compensation to be paid, which is recoverable through increased abstraction licence charges, as described above.
Water Quality The DWI can take enforcement action in the event that a Regulated Company is in contravention of regulatory requirements concerning the “wholesomeness” of water supplies. Court proceedings can be brought by the DWI in the name of the Chief Inspector of Drinking Water for the offence of supplying water “unfit for human consumption”, for example if discoloured or foul-tasting water is supplied to customers.
Pollution Prevention and Control The PPC Regime, adopted under the EU’s IPPC Directive, was introduced in the UK by the Pollution Prevention and Control Act 1999 (and the Pollution Prevention and Control Regulations 2000 made under that Act, the “PPC Regulations”). On 6 April 2008, the Environmental Permitting Regulations 2007 (the “Environmental Permitting Regulations”) came into force, replacing the PPC Regulations and combining
92
PPC and waste management licensing, bringing in a new regime (the “Environmental Permitting Regime”). Since their introduction PPC Permits are now known as “environmental permits” in the UK The aim of the Environmental Permitting Regime is to protect the environment from the potentially harmful effects of industrial installations: operators of certain such installations are required to be authorised by the EA (or local authority) under an environmental permit and are required to use the best available techniques to reduce environmental damage both during the life of an installation and following its closure. Depending on the type and volume of waste processed, certain water company activities can be subject to the environmental permitting regime. As the application of the environmental permitting regime to SWS’ current operations requires licenses for certain sites where combustion of sludge gas (biogas) occurs, SWS has applied for licences for the following sites:
(a) Budds Farm – Combined heat and power (“CHP”) installation with thermal input of more than 3 megawatts;
(b) Millbrook - CHP installation with thermal input of more than 3 megawatts;
(c) Ashford – sludge dryer with thermal input of more than 3 megawatts;
(d) Hastings - sludge dryer with thermal input of more than 3 megawatts; and
(e) Ford - sludge dryer with thermal input of more than 3 megawatts.
The 1999 Periodic Review business plan recognises future implications of the Environmental Permitting Regulations and includes capital expenditure and operating expenditure requirements that will ensure that future compliance will be achieved.
A case several years ago, United Utilities Water v Environment Agency [2006] EWCA Civ 633, extended the application of the PPC Regime to include treatment operations at wastewater treatment works which produce sludge. On appeal, the House of Lords in its judgment in October 2007 confirmed that wastewater treatment works carrying out intermediate wastewater treatment are covered by the PPC Regulations (now replaced by the Environmental Permitting Regulations 2007), even though final treatment and disposal takes place elsewhere. It is expected that other types of permits may be merged into the Environmental Permitting Regulations 2007 in autumn 2009, including groundwater authorisation, discharge consents and water abstraction and impoundment licences.
The EA continues to attempt to simplify and rationalise the regulatory regime, including that relating to the PPC Regime. These “better regulation” initiatives intend to transfer monitoring responsibilities from the EA to the relevant companies. Discussions are underway between the EA and Regulated Companies to agree the processes and costs which will apply following each transfer.
The EA intends to introduce an Operator and Pollution Risk Appraisal (“OPRA”) system and Operator Self Monitoring (“OSM”) to the regulation of discharges to water from Regulated Companies in April 2009. This will allow the EA to assess pollution hazards and to determine how many site visits a site should receive and what an operator should pay in fees and charges. As the responsibility, and therefore the cost, of monitoring will pass to operators, the EA has announced its intention to reduce subsistence charges to cover the extra costs associated with OSM and also to reward good management through reduced OPRA scores and subsistence charges. The new EA water fees were consulted on as an addendum to the Government’s Consultation on Local Authority Environmental Regulation of Industrial Plant: 2009/10 Fees and Charges, which closed on 2 January 2009.
Sewage Sludge The recycling of sewerage sludge by using it on agricultural land as a fertiliser and soil conditioner is recognised by the European Parliament and the European Commission as the Best Practicable Environmental Option for such material. Such recycling must be in accordance with the Sludge (Use in Agriculture) Regulations 1989 (as amended and supported by a Code of Practice for Agricultural Use of Sewage Sludge
93
(DoE 1996)) (the “Sludge Regulations”). The Government is currently amending these Regulations, but the water and wastewater industry has already invested for, and is complying with, the forthcoming amendments in advance of the Sludge Regulations coming into force. These amendments will give statutory effect to the water and wastewater industry’s voluntary agreement with the British Retail Consortium under the Safe Sludge Matrix. The European Commission is currently considering proposals to amend the EU’s 1986 Sludge Directive (86/278/EEC). There may be some tightening of metals and organic limits, in addition to following the UK approach on pathogen standards. However, the use of treated sludge in agriculture is recognised as important by the Commission, and they have a stated objective “to increase the quantity of sludge that is used on land in a sustainable manner”.
It should be noted that sludge use in agriculture is subject to both market forces and legislation. Significant changes to markets or legislation could cause Regulated Companies to incur material expenditure, but both legislation and markets have been recognised as potential “Relevant Changes of Circumstance” by Ofwat in relation to licences of Regulated Companies.
In the Final Determination of the 2004 Periodic Review, Ofwat did not identify the loss of the sludge to land route for sludge disposal as a “Notified Item” or a “Relevant Change of Circumstance” but indicated that it could be claimed under the change protocol as an item which could be considered for logging up purposes. If allowed by Ofwat, this would ensure appropriate costs are properly reflected in the RCV for the next pricing period.
Climate Change Energy use in water and wastewater treatment processes results in emissions of greenhouse gases and constitutes a significant environmental impact resulting from a Regulated Company’s activities. Regulated Companies are significant energy users and subject to the Climate Change Levy.
SWS may incur increased costs in the future due to increased electricity prices to account for carbon trading schemes applicable to electricity generators. There will be tighter caps on emissions and full auctioning of allowances to most electricity generators in Phase III of the EU Emissions Trading Scheme (“EU ETS”) that will run from 2013 to 2020. This is likely to give rise to a restriction on supply resulting in higher prices for carbon that are expected to be passed on by the generators to consumers in the price of electricity.
In November 2008, Parliament enacted the Climate Change Act 2008, which includes a framework for the adoption of environmental trading schemes. In the medium term, under the Climate Change Act 2008, SWS may be required to report on the current and predicted impact of climate change on its functions and its proposals and policies for adapting to climate change and must comply with any guidance or directions made by the Secretary of State under the Act.
The government published the Energy White paper on 23 May 2007. In order to reduce carbon emissions, the Government proposes to implement a mandatory cap and trade scheme - the Carbon Reduction Commitment (“CRC”). The focus of the scheme will be on large non-energy intensive sectors, where organisations whose mandatory half-hourly metered electricity consumption is greater than 6000MWh in calendar year 2008. This is expected to capture organisations with annual electricity bills across all sites in the region of £1 million or more. To determine whether this threshold is exceeded, the half hourly metered electricity consumption of all UK subsidiaries within a corporate group will be aggregated and the highest UK parent company will assume the obligations under the CRC on behalf of the whole group. Emissions that are covered under the EU Emissions Trading Scheme or by Climate Change Agreements will be exempt from the CRC. The scheme is scheduled to start in April 2010 with a three-year introductory phase in which allowances will be sold at a fixed price. A Government imposed cap and auctioning of allowances will be established from 2013 and the number of allowances available will decrease annually. Participants will be ranked according to their performance in the CRC in a league table that will be publicly available to provide a reputational driver to the CRC. Funds raised from the sale/auction of allowances are proposed to be returned to participants through a “recycling payment” that will be calculated in proportion to each participant’s contribution to total emissions
94
following each compliance year. Participants’ position in a league table will also impact on their recycling payment with a bonus or penalty applied according to its ranking (i.e. those that reduce their energy the most will benefit to the greatest degree). Given the nature of the operations of Regulated Companies, they are to fall within the scheme. The Government plans to issue a detailed consultation on draft regulations in March 2009. However, as the full details of the scheme are yet to be developed, the full impact of the scheme is still unclear.
The water and wastewater industry has also made a commitment to a 20 per cent. target for renewable energy
by 2020 and to research how it might better manage non-CO2 greenhouse gas emissions from wastewater treatment.
Climate change appears to have been a main driver in the Government’s new water strategy. On launching the strategy in February 2008, the Government stressed the need to reduce carbon dioxide emissions from water undertakers, to improve efficiency and to reduce demand and wastage. Some of the strategy’s proposals that may have the potential to impact Regulated Companies in the future include: (i) an independent review into water charging to advise on the role of metering and charging in the future and whether there is a need to move beyond the current system where companies in seriously water stressed areas may introduce mandatory metering where there is a clear case for doing so; (ii) new proposals to tackle surface water drainage; (iii) proposals to make the abstraction licensing system more able to cope with climate change in order to maintain a balance between demand for essential supplies and protection of wildlife and aquatic environments; and (iv) draft statutory Social and Environmental Guidance to Ofwat, which is currently laid before Parliament. The Guidance to Ofwat, together with the Statement of Obligations (a compendium of the key environmental and drinking water statutory obligations that was sent to all water and sewerage undertakers on 21 December 2007) were DEFRA’s first contribution to the 2009 Periodic Review of water price limits by Ofwat. By nature, Regulated Companies are exposed to the risk of increasing drought and consequent loss of abstraction resources resulting from the effects of climate change. It is likely that the use of such resources will become increasingly regulated as governments work to comply with their international obligations pertaining to the environment and as such resources become scarce. As a consequence and in order for Regulated Companies to comply with such increasing regulation and to adapt to and mitigate the risk of decreasing abstraction resources, it is likely that this will be a future area of investment for these companies. To the extent that such investment is not allowed by Ofwat for whatever reason, this may constitute a material liability for the relevant company.
Contaminated Land Part 2A of the EPA, together with certain implementing regulations and statutory guidance, establishes a legal regime to address the remediation of contaminated land (including controlled waters). Current and future impacts may be dealt with under other pollution control laws instead (for example, if the contamination arises out of an activity regulated under the Environmental Permitting Regime). Under Part 2A, the original polluter or any person who is a “knowing permitter” can be required to clean up contamination of land if it is causing, or there is a significant possibility of it causing, significant harm to the environment or to human health or if pollution of controlled waters is being or is likely to be caused. The Water Act amended Part 2A of the EPA in relation to water pollution so that it applies only if significant pollution of controlled waters is being caused or there is a significant possibility of such pollution being caused but a date is still to be appointed by the Secretary of State/Welsh Assembly for this amendment to come into force in relation to England and Wales respectively. If the polluter or a knowing permitter cannot be found, the owner or occupier of the land may be held liable, whether or not it caused the contamination. Civil liability may also arise (under such heads of claim as nuisance or negligence) where contamination migrates into or on to third-party land and/or impacts upon human health, flora or fauna and liability for contamination may also rest with a Regulated Company where the contamination emanating from its land arose as a result of the activities of one of its statutory predecessors. In practice, remediation of contaminated land is most likely to be triggered on the cessation of regulated activities or the redevelopment of land.
95
Asbestos The Control of Asbestos Regulations 2006 impose a duty on those who own or control commercial premises to carry out detailed assessments for the presence of asbestos, record its condition and proactively manage the associated risks.
Trade Effluent Discharge Regulated Companies are responsible under the WIA for regulating discharges of trade effluent into their sewers. Industrial and trade sources of wastewater to sewers arise from a wide range of industries, such as food manufacturers, car washes and laundries. Regulated Companies regulate these discharges to protect their operations and the environment.
Under section 118 of the WIA, an owner or occupier of premises who wishes to discharge trade effluent into public sewers must apply to the relevant Regulated Company for consent to do so. In considering whether or not to grant such a consent, the Regulated Company will usually have regard to the effect that receiving the effluent will have on the performance of its wastewater treatment works and associated discharges. Such a consent may be subject to conditions imposed by the Regulated Company. These conditions can stipulate treatment to be undertaken to minimise the polluting effects of the discharge, as well as charges to be paid in respect of the trade effluent discharge. Under the Trade Effluents (Prescribed Processes and Substances) Regulations 1989 (SI 1156) (as amended in 1990 and 1992), when trade effluent contains prescribed substances, or more than a prescribed quantity of such substances, or derives from a stipulated process (that is “special category effluent”), the Regulated Company must refer to the EA any application to make such a discharge. The EA must then determine whether, and if so upon what conditions, the Regulated Company may accept the discharge. The Regulated Company cannot consent to the discharges to which the reference relates until the EA serves notice on the Regulated Company of its determination on the reference. Any person aggrieved by the refusal of a Regulated Company to give consent or by conditions imposed in a consent can appeal to Ofwat.
The Regulated Company may review the terms of any consent from time to time and vary those terms by notice. However, this power is subject to restrictions. In addition, in certain circumstances, the EA has the power to review discharges of special category effluent, and may require the termination or variation of the relevant discharge. Again, this power is subject to restrictions, unless the review is required to enable compliance with EU obligations or international agreements, or for the protection of the environment.
A Regulated Company may enter into an agreement with the owner or occupier of trade premises for the reception and disposal of trade effluent, instead of granting a consent. If the trade effluent which is to be the subject of an agreement is special category effluent, the Regulated Company must refer to the EA the question of whether the relevant operations should be prohibited or made subject to conditions. The Regulated Company cannot enter into any agreement regarding special category effluent until the EA serves notice on the Regulated Company of its determination in this regard.
It is an offence to discharge trade effluent from trade premises without a consent from, or an agreement with, the relevant Regulated Company, or to fail to comply with the conditions in a consent, and in both cases the maximum penalty is an unlimited fine.
Discharge consents are also subject to the review of consents undertaken by the EA under the Habitats Directive as referred to above, which could lead to modification or revocation of the same. The implementation of the Water Framework Directive and subsequent relevant directives will also drive trade effluent consent reviews, tightening trade effluent consent limits.
Sewer Flooding When a “combined” sewerage system, which carries both sewage and surface water run-off, reaches its capacity during heavy rainfall, a mixture of surface run-off and sewage overflows into rivers or out of external or internal drains. Section 94 of the WIA places a duty on every Regulated Company to ensure its
96
area is properly drained via an adequate sewerage system. This duty is enforceable by the Secretary of State or Ofwat who, under section 18 of the WIA, may make an Enforcement Order securing compliance. Householders can bring proceedings against the Regulated Company in respect of its failure to comply with such an Enforcement Order. However, where such an order has not been made, the only remedy available to such householders is to request that the Secretary of State or Ofwat makes an order and, if one is not forthcoming, to pursue judicial review proceedings against either the Secretary of State or Ofwat on the grounds of their failure to act. Householders do not have the right directly to enforce section 94 against Regulated Companies. This was confirmed by the House of Lords’ decision in Marcic v Thames Water Utilities [2003] UKHL 66.
In Environment Agency v Thames Water Utilities Limited [2008] EWHC 1763 (QB), the EA prosecuted Thames Water Utilities Limited for a number of offences alleged to have occurred in 2003, including the deposit of untreated sewage constituting “controlled waste” without a waste management licence contrary to section 33(1)(a) of the EPA. A preliminary point of law was referred by the Divisional Court to the ECJ (Case C-252/05) as to whether or not sewage escaping from a sewer governed by the UWWTD and the WIA falls within the scope of domestic waste controls implementing the Waste Framework Directive 75/442/EEC (as amended by Directive 91/156/EEC). The ECJ ruled that wastewater which escapes from a sewerage network maintained by a statutory wastewater undertaker pursuant to Council Directive 91/271/EEC of 21 May 1991, constitutes waste within the meaning of the Waste Framework Directive. The ECJ also ruled that it falls to the national court to ascertain whether national rules outside of those implementing the Waste Framework Directive may be regarded as “other legislation” containing precise provisions organising the management of the waste in question, and if they are such as to ensure a level of protection of the environment equivalent to that guaranteed by the Waste Framework Directive. On 28 July 2008, the Divisional Court held that sewage escaping from pipes maintained by a statutory undertaker is “controlled waste” within the meaning of section 33 of the EPA, and thus falls within the UK’s waste management regime and is subject to the enforcement authority of the EA. This decision may result in significant and costly changes to the operational practices of sewerage undertakers and, to the extent such expenses need to be incurred, it is currently unclear whether Ofwat will consider such expenditure as a “Relevant Change of Circumstances” under a licence (resulting from a “Change of Law”), and hence whether a Regulated Company will be eligible to apply for an IDOK.
Combined Sewer Overflows (“CSOs”) The development of urban drainage systems has evolved over time. Sewage systems are designed to cope with the combined flow of sewage and storm water up to a particular level, which is consented to by the EA (the “Consented Discharge”). Where, during heavy rains, the level of sewage and storm water exceeds the level that the sewerage systems are designed to cope with, the Consented Discharge is allowed to flow into the relevant watercourse in order to prevent flooding in the surrounding area. The drainage systems vary considerably in their age, design, and hydraulic performance and the EA regulate and monitor the impact of these discharges on the aquatic environment. Any discharges which are considered to be unsatisfactory may be required to be improved through the investment programme agreed as part of the Periodic Review process.
It is a requirement of the UWWTD that Member States limit the pollution of receiving waters by untreated sewage discharge. To meet this requirement, the EA uses performance criteria to assess the impact of CSOs and to determine whether they should be regarded as “satisfactory” or “unsatisfactory”. CSOs will be regarded as unsatisfactory if, for example, they cause a breach of water quality standards or other EC directives, they cause or significantly contribute to a deterioration in river chemical or biological quality/class, or they cause a significant visual or aesthetic impact due to solids or sewage fungus and have a history of justified public complaint.
Discharge into Controlled Waters If Regulated Companies wish to discharge polluting matter into controlled waters, whether from continuous or intermittent (Storm/CSO) outfalls, they must seek a consent from the EA. Generally applications are made under section 88 and Schedule 10 of the WRA (although consents under the WIA may be required for works
97
carried out at reservoirs, wells or boreholes where discharges are made through pipes of a certain size). The EA has the power to grant or refuse consents, to impose conditions, or to modify, vary or revoke such consents. Consent conditions may control the quantity of a discharge or the concentrations of particular substances in it, or impose broader controls on the nature of a discharge. They are based on objectives set by the EA for the quality of the relevant receiving water as well as any relevant water quality standards in EU Directives. The UWWTD, which is implemented by the Urban Waste Water Treatment Regulations 1994 (as amended in 2003) requires that, as a first step in implementation, sensitive, normal and less sensitive areas are identified in the UK Minimum standards of treatment are then specified according to the size of the population and/or the level of economic activity in the area from which the wastewater arises and the sensitivity of the waters into which the treated water is discharged. It is a criminal offence under the WRA to cause or knowingly permit any discharge of trade or sewage effluent or other poisonous, noxious or polluting matter into controlled waters. However, there is a defence if it is carried out in compliance with a consent. The principal prosecuting body is the EA. Under the WRA, the EA is empowered to take remedial action to deal with actual or potential pollution of controlled waters and may recover the reasonable costs of any works undertaken from any person who caused or knowingly permitted the pollution (and can also require that person to take the remedial action itself).
As a result of a decision of the Court of Appeal in March 2001, Regulated Companies will in future have to negotiate contracts with the owners of certain watercourses in order to be able to discharge treated sewage effluents into such watercourses.
Non-compliance Section 85 of the WRA provides for a number of water pollution offences which include causing or knowingly permitting any poisonous, noxious or polluting matter or any trade or sewage effluent to enter controlled waters unless the relevant discharge is made under and in accordance with a regulatory consent (including a discharge consent), and failing to comply with the conditions in a discharge consent. The maximum penalty for these offences is an unlimited fine or two years’ imprisonment, or both.
Under section 87 of the WRA, a Regulated Company will be regarded as responsible for a discharge of sewage effluent if it was bound to receive into its sewers the matter included in that discharge. However, a Regulated Company will not be guilty of an offence under section 85 if the offending discharge is attributable to a discharge into a sewer by a third party which the Regulated Company was not bound to receive and could not reasonably have been expected to prevent.
Groundwater Activities that could lead to the contamination of groundwater such as direct and indirect discharges of certain prescribed substances to groundwater, are regulated under the Groundwater Regulations 1998 (the “Groundwater Regulations”). The Groundwater Regulations require authorisation of such discharges. Direct discharges, which are those ones which enter, without percolation, straight into groundwater, are already controlled under, for example, the WRA or the environmental permitting regime (previously known as the PPC Regime) (see above), and applications for authorisations for these discharges will continue to be made under that legislation. Any authorisations granted must be consistent with the requirements of the Groundwater Regulations. Indirect discharges, which are those which enter groundwater following percolation through ground or subsoil, may arise from the disposal or tipping for the purposes of disposal to land of certain prescribed substances, and applications for authorisations for them will be made to the EA under the Groundwater Regulations. The EA also has the power under the Groundwater Regulations to issue notices to control activities (other than the activities of disposal) which may cause an indirect discharge to groundwater of certain prescribed substances – for example, oil from underground storage tanks. Before issuing such notices, the EA must take account of any code of practice issued for the purposes of the Groundwater Regulations.
98
A new Groundwater Directive (2006/118/EC) was adopted in December 2006. The UK carried out a consultation regarding transposition into UK law of Article 6 of the Directive (relating to measures to prevent or limit inputs of pollutants into groundwater), which closed on 20 August 2008. According to DEFRA, the impact of the proposed amendments on Regulated Companies should be minimal and the overall costs are expected to be neutral.
Hazardous Substances Regulated Companies operate facilities which house hazardous substances (e.g. oil, polychlorinated biphenyls (“PCBs”)) and which therefore could be subject to the following regulatory requirements: (i) the Control of Pollution (Oil Storage) (England) Regulations 2001, which require that all new and existing above ground storage facilities holding more than 200 litres of oil have minimum design standards to prevent spilt or leaking oil from entering controlled waters; (ii) the Environmental Protection (Disposal of Polychlorinated Biphenyls and other Dangerous Substances) (England and Wales) Regulations 2000, which regulate electrical equipment that contains PCBs (for example, since 31 December 2000, holding PCBs or equipment containing PCBs has been prohibited); and (iii) the Control of Major Accident Hazards Regulations 1999 (as amended) (“COMAH Regulations”) which give effect to a safety regime for the prevention and mitigation of major accidents at establishments where named dangerous substances or dangerous substances falling within certain generic categories are present in specified quantities. The COMAH Regulations apply at two thresholds, the lower tier and the top tier, depending upon the quantities of dangerous substances that are present. Operators must comply with lower tier duties (such as taking all measures necessary to prevent major accidents and limit their consequences) and operators that have quantities of dangerous substances over the higher threshold are subject to the additional top tier duties (such as preparation of a safety report).
Management of Water Resources
Water Resources Planning The Water Act amends the WIA to provide that Regulated Companies are under a duty to further water conservation when they formulate or consider any proposal relating to their functions and has placed water resources management plans on a statutory footing: Regulated Companies are now under a duty to produce Water Resources Management Plans and publish and consult upon them. These plans will set out how the Regulated Company will manage and develop water resources so as to be able, and continue to be able, to meet its water supply duties under the WIA. It must address, amongst other things, the Regulated Company’s estimate of water it will need to meet its duties, and the measures it intends to take to manage and develop resources. The planning period is 25 years. Plans will be subject to an annual review (the conclusion of which must be sent to the Secretary of State) and will have to be revised every five years, or in any case where the annual review indicates a material change in circumstances, or the Secretary of State directs that a revised draft should be prepared. In the past, Regulated Companies have produced Water Resources Management Plans on a voluntary basis every five years and produced an annual review for the EA each subsequent year.
As described above, Water Resources Management Plans are likely to fall within the scope of the Strategic Environmental Assessment Directive (2001/42/EC), if their preparation began on or after 21 July 2004. In addition, the plans will need to take account of the Habitats Directive (92/43/EEC) and the likely effect of any measures on protected habitats.
On 20 November 2008, Ofwat announced targets for water companies to increase water efficiency savings by 40 per cent. from 2010 (i.e. to assist customers to save 40 per cent. more water when compared with the past three years). A revenue corrected price cap would compensate water companies for any revenue shortfall relative to expectations, but water companies would get to keep the cost saving from supplying less water. Ofwat would “name and acclaim” the best performing water companies. Where a water company failed to meet its targets, not due to circumstances beyond the water company’s control, Ofwat might impose a penalty, such as naming and shaming the water company, requiring an action plan or making a shortfall adjustment in subsequent price limits.
99
Drought Planning There are various water restriction options available to Regulated Companies in times of drought, which could be applied, in the order set out below, depending on the severity of the drought situation and the approval of either DEFRA or the EA.
– Voluntary water restrictions which generally involve press campaigns to encourage customers to voluntarily restrict their use of water.
– Hosepipe and sprinkler ban which prohibits the watering of private gardens with hosepipes, sprinklers, perforated hoses, trigger hoses or irrigation systems and the washing of all private cars with hosepipes. Watering gardens with watering cans or using buckets to wash cars is permitted. These restrictions were empowered by the WIA, they can be implemented following express notice and do not require DEFRA or EA consent. Following a public consultation, the Government announced in October 2007 that the current hosepipe ban rules will be replaced by a discretionary use ban to expand the range of prohibited hosepipe uses. Many of the uses specified in the Drought Direction 1991 detailed below will also be moved into the proposed discretionary use ban. However, these changes have not been legislated on as yet and are expected in the forthcoming Floods and Water Bill.
– An Ordinary Drought Order is granted by DEFRA and allows a Regulated Company to stop or limit the use of water for a range of purposes specified in the Drought Direction 1991 (made by the Secretary of State), such as: watering of parks and sport or recreation grounds; ornamental fountains; cleaning the exteriors of buildings; and washing of road vehicles, railway rolling stock, aircraft (other than for safety/hygiene). An Ordinary Drought Order lasts for up to six months, but can be extended up to a year. The prohibition of the watering of parks, gardens and landscaping, ornamental fountains, the filling of swimming pools and the washing of buildings and private boats are likely to be covered by discretionary powers in the proposed discretionary use ban.
– A Drought Permit is granted by the EA and allows a Regulated Company to take water from new sources, or increase the amount of water taken from existing sources. A Drought Permit lasts for up to six months, but can be extended up to a year.
– An Emergency Drought Order is granted by DEFRA and allows a Regulated Company to limit usage “for such purposes as it thinks fit”, and to set up standpipes or water tanks to provide water during rota cuts. Emergency Drought Orders can last for up to three months, but can be extended up to five months.
The necessary powers for an Ordinary Drought Order, a Drought Permit and an Emergency Drought Order are provided under the WRA.
Regulated Companies are under a statutory duty to consult on, prepare and maintain a drought plan. This plan should prescribe how the Regulated Company will continue during a period of drought to discharge its duties to supply adequate quantities of wholesome water with as little recourse as reasonably practicable to Drought Orders or Drought Permits.
The plan must include measures that the Regulated Company might need to take to restrain the demand for water in its water region and those it might need to take to obtain extra water from other sources. The Secretary of State may issue directions as to the content of the plan. Drought plans must be reviewed within three years of the date they were published and should be revised or reviewed if there is any material change of circumstances or if the Secretary of State directs.
Sustainability Reductions The management of water resources by Regulated Companies is subject to a number of challenges, including: dry weather conditions; climate change; increasing demands for water; rises in leakage rates; aquifer contamination from industrial and agricultural pollution; and reductions in abstraction required to ensure sustainable river systems. In relation to the latter, the EA has been instructed by DEFRA to use its powers to
100
revoke damaging abstraction licences. The Restoring Sustainable Abstraction Programme was set up by the EA in 1999 with the purpose of investigating and, where appropriate, resolving the impacts of abstraction on sites designated by statutory drivers (for example, the Habitat Regulations) and undesignated sites of concern to local communities.
In previous years, funding for environmental sustainability reductions has been provided through the Periodic Review with the solution chosen to achieve the abstraction reduction (such as use of an alternative water supply source) being funded prior to its implementation. This funding mechanism is no longer available for the AMP4 Period and subsequent AMP Periods. Licence reductions will now be funded through the payment of compensation by the EA, with the money being paid after the licence reduction. The EA plans to raise the funds through the abstraction charges scheme, the majority of which charges are paid for by Regulated Companies. From 2012, the EA will have the power to revoke existing abstraction licences without paying compensation, so long as it gives six years’ prior notice. At this time, a funding route for sustainability reductions will need to be found, and it is possible that the Periodic Review mechanism will be used again.
Planning and Environmental Impact Assessment All development carried out by Regulated Companies currently requires planning permission from the relevant local planning authority, unless the development is considered to be permitted development under the Town and Country Planning (General Permitted Development Order) 1995, in which case planning permission for it is effectively granted by the development order without any application being made. However, following the passing of the Planning Act 2008, major developments which are categorised as Nationally Significant Infrastructure Projects (each, a “NSIP”) will be granted permission following a different procedure that is due to take effect from 2010, as outlined below.
Currently, the relevant local planning authority will consider applications for planning permission against the backdrop of the development plan compiled for its area, which sets out objectives, policies and proposals for the use of land. Major projects, such as the development of new pipelines or reservoirs, or the construction of or extensions to wastewater or water treatment works, may also be subject to an environmental impact assessment (“EIA”) under the Town and Country Planning (Environmental Impact Assessment) (England and Wales) Regulations 1999 (as amended) (the “EIA Regulations”). An EIA is a procedure for drawing together in a systematic way a project’s likely significant environmental effects. Projects falling within Schedule 1 of the EIA Regulations (for example, a wastewater treatment works with a capacity exceeding 150,000 population equivalent) will require an environmental impact assessment in every case. Projects falling within Schedule 2 of the EIA Regulations (for example a wastewater treatment works which does not fall within Schedule 1) will require an assessment only if they are judged likely to give rise to significant environmental effects.
The main part of the assessment is the environmental statement which contains: a description of the development, a description of measures to be taken to mitigate environmental effects, the data necessary to identify and assess the main environmental effects, an outline of the main alternatives to the development and a non-technical summary. The environmental statement will generally accompany the planning application that is submitted to the local authority. The EIA Regulations require that the statement be publicised: public authorities with relevant environmental responsibilities and the public must be given an opportunity to give their views about the project and the statement. The local planning authority is under a duty to take into account the environmental statement, together with any representations made on it, in determining the planning application.
Applicants have the right to appeal against a decision to refuse an application for permission. Appeals from a decision of the local planning authority are normally dealt with by the Planning Inspectorate on behalf of the Secretary of State.
Following the passing of the Planning Act 2008, any development defined as a NSIP, which includes the construction or extension of a dam/reservoir, development relating to the transfer of water resources and the
101
construction of waste water treatment plants, is to be granted planning permission pursuant to a special regime which is due to take effect in 2010. The developer will be required to follow a detailed pre-application procedure which will involve both publicity and consultation. The application will be submitted to the infrastructure planning commission (“IPC”), rather than the local planning authority, which will usually have 6 months to consider the application and a further 3 months to determine the application. It will be possible to appeal a decision to refuse or grant development consent by Judicial Review, which must be brought in the High Court within 6 weeks. The intention of the legislation is that major planning applications will be dealt with more efficiently and quickly in light of the new proposals. EIAs will still need to be conducted where required under the EIA Regulations.
Rather than planning permission being granted against the backdrop of the local development plan the IPC must have regard to national policy statements (“NPS”), which are statements prepared by the Government following consultation. NPSs will set out the national agenda as regards water and waste requirements and will incorporate social, economic and environmental policies. NPSs are to be considered and consulted on in 2009 with an aim to implement the new system for NSIPs in 2010.
Another effect of the Planning Act 2008 is the proposed imposition of a community infrastructure levy (“CIL”) which is a charge payable by the developer/owner where their development increases demands on local infrastructure. The Government is expected to publish and consult upon draft regulations later in 2009 that will enable local planning authorities to charge CIL from October 2009.
Competition in the Water Industry
General Each Regulated Company effectively holds a geographic monopoly within its appointed area for the provision of water and wastewater services although there is some limited competition. Ofwat has stated that it will use its powers under the Competition Act to investigate and prohibit anti-competitive practices and abuses of a dominant position to ensure a level playing field in the industry.
The current main methods for introducing competition are:
(i) inset appointments which allow one company to replace another as the statutory undertaker for water or wastewater services in a specified geographical area within the other Regulated Company’s appointed territory (see the section “Termination of a Licence” above);
(ii) facilitating developers, or their contractors, to provide new water mains and service pipes instead of asking Regulated Companies to do the work (“self-lay”). The Water Act introduced a statutory framework for self-lay (see below);
(iii) water supply licence (retail) - when a water supply licensee purchases wholesale supplies of water from the existing water undertaker and supplies water to a customer’s eligible premises (i.e. using 50 megalitres per annum). The Water Act introduced a statutory framework for such licences. Regulated Companies have published indicative access prices, based on the “cost principle” which indicate the approximate scale of discount they would offer to licensees;
(iv) water supply licence (combined) - when a water supply licensee introduces water into the supply system and supplies water to its customer’s eligible premises using a Regulated Company’s network (referred to as “common carriage”). All Regulated Companies maintain access codes which set out the conditions under which licensees may introduce water into their networks;
(v) cross-border supplies where a customer in an area adjacent to a neighbouring Regulated Company’s territory can connect to another Regulated Company’s network and receive a supply; and
(vi) private suppliers or private sewers including on-site water and effluent treatment.
102
However, Ofwat is concerned that these methods are not sufficient to promote effective competition. On 13 July 2007, Ofwat published a consultation paper which set out a number of possible options for developing the current regime, as well as various options for longer term change to the water and sewerage industry (see “Consultation on market competition in the water and sewerage industries in England and Wales”, published 13 July 2007). This was followed in December 2007 by a further consultation document setting out its proposals for introducing further competition in the water and sewerage industry in England and Wales by way of changes to the regime (see “Market competition in the water and sewerage industries in England and Wales Part I: Water Supply Licensing”, published 20 December 2007). This document also sets out industry responses to the longer term changes that it identified in the July 2007 consultation paper. Ofwat published the second part of that report on 16 May 2008 which, among other things, considers these issues in more detail (see “Ofwat’s review of competition in the water and sewerage industries: Part II”).
On 17 December 2008, Ofwat published a summary of the responses received in relation to its May 2008 report. Ofwat stated in the summary that it would take account of the respondents’ views as part of its response to the consultation on the Cave Review interim report (referred to below).
In its May report, Ofwat sets out recommendations to the Government as to the measures that could be taken to increase the benefits of competition in the water and wastewater sector.
Many of these proposals would, if ultimately implemented, require legislative changes and therefore the support of the Government. The recommendations include:
(i) Vertical separation: As a first step towards vertical separation, Ofwat intends to require Regulated Companies to separate their accounting for their different activities. Ofwat also intends to introduce formally separated price controls for each set of contestable activities and natural monopoly activities for the price control period after 2015. Ofwat is also recommending the legal separation of Regulated Companies’ retail businesses;
(ii) Retail services market: In addition, Ofwat recommends removing the “costs principle” for determining access prices from the legislation and replacing it with a set of general criteria for access pricing and requiring Ofwat to decide the specific method(s) for access pricing having regard to these criteria. Ofwat also recommends including sewerage retail services within the competition framework;
(iii) Water resources and treatment: Ofwat is recommending the potential introduction of changes to the regime (including water rights trading). Ofwat will work with the EA to develop this proposal. Ofwat will also ensure that future price controls do not unnecessarily perpetuate market power in contestable upstream markets;
(iv) Sewerage, sewage and sludge treatment and disposal: Ofwat intends to conduct an analysis to assess the potential for competition in sewerage and sludge treatment and disposal markets; and
(v) Ofwat recommends that, in principle, inset appointees should be treated the same as other appointed water and sewerage companies, in relation to all its recommendations. Ofwat will consider the detailed implications for inset appointees of each of its proposals.
Ofwat intends that its May 2008 report and the responses it received will contribute to the Government’s independent review of competition and innovation in the water sector launched by DEFRA in February 2008 (the “Cave Review”). The Cave Review, announced in “Future Water – the Government’s Water Strategy for England” published on 7 February 2008 includes an assessment of the costs, benefits, risks and feasibility of extending competition and contestability in water and sewerage services by looking at potential models in liberalised markets, best practice in other industries and demand from stakeholders. It will include consideration of the impact of proposed changes on: availability and sustainability of water supplies; prices; quality of service; public health; environment; encouraging water efficiency; innovation, research and development; investment in infrastructure; and reducing regulatory burdens. On 18 November 2008, the Cave Review published an interim report for consultation. The final report, which will make recommendations to
103
the Government, is likely to be published in Spring 2009. On 19 January 2009 Ofwat published its response to the Cave Review interim report (see “Ofwat’s response to the independent review of competition and innovation in water markets”, published on 19 January 2009).
The Cave Review interim report sets out preliminary findings and recommendations to the Government. In summary, the Cave Review is in favour of a phased approach for the introduction of competition, starting with customer groups and types of activity where the risk-return ratio is most favourable (non-household customers) and then introducing further competition at appropriate break points on the basis of advice from Ofwat and other parties. The report focuses on retail competition, reforms to the abstraction licence and discharge consent regimes and upstream competition. The recommendations include:
(i) Retail competition: the Cave Review recommends the reduction of the threshold for competition applicable with respect to non-household users to five megalitres per year as soon as practicable (the 2008 Pre-Budget Report indicates that DEFRA will consult on the implementation of this early in 2009) and to one megalitre in 2012. In around 2012 competition should also be extended to retail sewerage services in order to give these users choice of both their water supplier and wastewater services supplier. The Cave Review considers that the Government could then give consideration to extending competition to the remaining non-household users (after 2012) and household users (after 2014) on the basis of advice from Ofwat and other parties and with the hindsight of experience gained from retail competition for large non-household users.
The Cave Review further recommends the following measures for retail competition:
– Price cap: when competition is extended to retail sewerage services, in order to protect customers from the risk of higher prices or decline in services, all retailers should offer a default retail tariff and minimum levels of service set by Ofwat, initially at the current level of the retail price cap. Small non-household and household users should further be protected by a statutory code on mis-selling;
– Vertical separation: retail divisions of water companies should be made legally separate from their network business. This would be implemented around 2012;
– Single regional wholesaler: all retailers would buy services from a single regional wholesaler – the present incumbent – who could sell at an average price to all retailers;
– Wholesale price for water and wastewater services: this should be determined by Ofwat at a level that allows the upstream operator to cover its efficient network, treatment and disposal costs, including an appropriate return on capital. Accordingly, it would be based on full economic costs rather than on the “costs principle” which would be removed from primary legislation. This would be implemented around 2012;
– Introduction of a new self-supply retail permit so that customers fulfilling certain requirements, in particular public health considerations, could buy direct from the wholesaler;
– On the introduction of retail legal separation, replacement of the current water supply licence and undertaker appointment frameworks with a system of retail permits. In the interim period, in order to encourage competition, Ofwat should consider the need for additional changes to the water supply licence and inset appointment regime to make them more efficient and effective. The review recommends that Ofwat publishes revised inset guidance as soon as practicable;
– Replacement of the current WSL system of regionally negotiated access agreements with national market and operational codes binding for all market participants across England and Wales;
104
– Reform of the merger regime for retail companies once retail competition has been introduced (e.g. by removing the need for an automatic reference to the Competition Commission); and
– Introduction of a statutory duty on Ofwat to review the state of retail competition every two years based on the principles set out in the Cave Review’s Terms of Reference.
(ii) Abstraction licence and discharge consent regimes: a fuller assessment and costs/benefits analysis of competition will be set out in the final report. At this stage, the Cave Review makes some recommendations with a view to incentivise new water and wastewater services suppliers to enter the market:
– The charging regime should be reformed to reflect social, economic and environmental costs of water abstraction and discharge. A new system could be designed to enable permit holders to be compensated for loss of permits, for vulnerable consumers to be supported and for environmental benefits to be secured. Such reform would be implemented around 2012;
– Trading of permits and raw water should be encouraged to provide a benchmark of the true price of water and support the introduction of competition. This could involve the EA becoming a market participant and the design of appropriate trading rules. This would be implemented after 2015; and
– Once environmental sustainability has been obtained and permits are time-limited an auction system for permits could be established.
(iii) Upstream competition: a fuller assessment and costs/benefits analysis of competition will be set out in the final report. The Cave Review considers that upstream competition is potentially more complex and costly to institute than retail competition and, whilst there are good grounds to consider the introduction of upstream competition after retail competition, the decision is some way off. Accordingly, whilst the report identifies a series of changes in the legislative and regulatory framework of upstream markets that may be required if further competition was to be introduced, it does not offer a final view or immediate recommendations to that effect.
The Government has announced its intention to consult on a Water and Floods Bill in the Spring of 2009. DEFRA has stated that the bill will include “any changes that may be required to the competition regime as a result of recommendations from the current independent review”. On 24 November 2008, the Chancellor of the Exchequer presented the 2008 Pre-Budget Report. The Government has accepted the recommendation in Professor Cave’s interim report that there should be a phased approach to furthering competition, and as a first step has announced a package of measures to extend and enhance retail competition in the water markets in England for large non-household users. This package consisted of: lowering the usage threshold above which businesses and other non-domestic customers are eligible to switch supplier from 50ML to 5ML, extending the competition regime to wastewater services, replacing the current legislated access pricing arrangements with simplified Ofwat criteria and introducing nationally agreed codes to be coordinated by Ofwat in conjunction with stakeholders. The Government will respond to further recommendations once it receives the final report but has already indicated that it is ‘strongly minded’ to mandate the legal separation of water companies’ retail activities. The Government announced that DEFRA will launch a public consultation on the implementation of the 5 megalitre eligibility threshold early in 2009, and will consult on the implementation of the other measures as part of the Water and Floods Bill.
The Water Act The Water Act contained provisions aimed at increasing the opportunities for competition in the supply of water services to non-household high-volume users. The eligibility threshold for such users has been set initially at 50 megalitres per year, though there is a mechanism to amend the threshold through secondary legislation.
105
The Water Act introduced a system to license new water suppliers either under a “retail licence” or a “combined licence”. The new licensing system commenced on 1 December 2005. A “retail licence” enables the holder to purchase water from the Regulated Company to supply to its customers through a wholesale agreement with the Regulated Company. Retail services could range from simply contracting with the customer to provide a supply and billing for the supply, to a much wider range of services including water efficiency planning, metering and providing tailored customer services. A “combined licence” is a retail licence with a supplementary authorisation to allow the holder to introduce water into the supply system (“common carriage”) in connection with a supply to customers’ premises in accordance with its retail authorisation. Such a licensee may have its own water sources or it may purchase water from a neighbouring Regulated Company to import into the “local” Regulated Company’s supply system. The offset is the lesser of the estimated revenue from the adopted main or the annual borrowing costs of a hypothetical loan for the costs of providing the water main. This introduction must be done through an access agreement with the relevant Regulated Company. Before a combined licence is granted, the Secretary of State must be consulted so that the DWI can give its assessment as to the applicant’s suitability to introduce water into the public supply network. Regulated Companies are excluded from holding a retail or combined licence but an associated company of a Regulated Company may do so.
Before a Regulated Company is required to provide a wholesale supply of water to a licensee in respect of customers in the Regulated Company’s appointed area, certain conditions must be satisfied. Where a request is made for such a wholesale supply, the Regulated Company is under a duty to take steps to enable the supply to be made and to provide that supply in accordance with terms agreed with the supplier or determined by Ofwat, for example, connecting a new customer to the main. However, there are certain circumstances in which the duty on a Regulated Company to supply a licensee does not apply.
Equally, certain conditions apply when Regulated Companies are required to allow licensees with a combined licence to introduce water to their supply systems. The duty on Regulated Companies to allow licensees to introduce water is limited to where a request is in connection with a specific supply to a customer under the licensee’s retail authorisation. The Regulated Company will also be under this duty where it has agreed (outside the competition provisions in these clauses) to treat a licensee’s water so that it can be introduced into the supply system and, in connection with that introduction, the licensee requests that the Regulated Company permit the licensee to then introduce water into the supply system for the supply of its customers. The Regulated Company that receives a request to introduce water to its supply system must take steps to permit this in accordance with the terms agreed with the licensee or determined by Ofwat. Such steps may include laying a pipe to connect the licensee’s treatment works with the Regulated Company’s supply system. However, there are certain circumstances in which the duty on the Regulated Company to allow the licensee to introduce water to its supply system does not apply.
A licensee may seek a determination from Ofwat as to whether a refusal on the part of the Regulated Company to provide a wholesale supply or to permit water to be introduced was justified. Where the terms cannot be agreed with the Regulated Company for such an arrangement, Ofwat will determine the terms and conditions and, if the licensee agrees, these will form the contract. The charges payable by the licensee under the agreement or determination must be fixed in accordance with the costs principle.
The costs principle, as set out in section 66E of the WIA (introduced by section 56 of the Water Act), is that Regulated Companies are to recover from licensees two elements of cost to the extent that those sums exceed any financial benefits the Regulated Companies receive as a result of the licensee using the system:
(i) the direct costs of providing any wholesale supply to a licensee or permitting the introduction of water into the supply system; and
(ii) an appropriate amount (the expenses which the Regulated Company would have ordinarily received from its customers if they had not been supplied by the licensee which cannot be reduced or avoided)
106
of qualifying expenses (those incurred in performing statutory functions) together with a reasonable return on that amount.
Under the Water Act, it is an offence to use a Regulated Company’s system to supply the premises of a customer unless the supply is made by a Regulated Company or a licensee in pursuance of its licence. It is also an offence to introduce water into a Regulated Company’s supply system except for the introduction by a licensee in pursuance of its licence or by another Regulated Company under an agreement with the Regulated Company in question or under a bulk supply agreement. The Secretary of State may, however, by statutory instrument grant exemptions to the above offences.
The Water Act also sets out a statutory framework for self-lay and adoption of water mains and service pipes including the steps to be taken and the agreement that must be entered into by a developer or self-lay organisation proposing to construct water mains or service pipes which are to be vested in the Regulated Company. It provides that the main must be built in accordance with the agreement of the Regulated Company to enable it to be adopted on completion and Regulated Companies may not connect new mains or service pipes to their public networks unless they are adopted in this way. There are certain situations, however, when appeals can be made to Ofwat if the Regulated Company refuses to enter into an adoption agreement on reasonable terms. The Water Act also sets out that the person who enters into the adoption agreement relating to a water main must pay the Regulated Company’s reasonable costs of incorporating the water main within its existing water mains network. It also provides for an offset payment to be made by the Regulated Company to the developer or self-lay organisation equivalent to the discounted estimated sum of the water charges for the first 12 years in respect of the premises expected to be connected to the new main. In respect of self-lay and adoption of water mains, Ofwat issued a guidance note to the regulatory directors of water and sewerage companies on 17 August 2005. A third version of this guidance (which was published in August 2008 and invited comments by the end of October 2008) is currently being consulted upon.
The Competition Act The Competition Act came into force in March 2000 and introduced two prohibitions concerning anti- competitive agreements and conduct and powers of investigation and enforcement.
The Chapter I Prohibition prohibits agreements, decisions by associations of undertakings or concerted practices between undertakings which may affect trade within the UK and which have as their object or effect the prevention, restriction or distortion of competition within the UK The Chapter II Prohibition prohibits the abuse of a dominant market position which may affect trade within the UK.
Ofwat has concurrent powers with the OFT to apply and enforce the Competition Act 1998 to deal with anti- competitive agreements or abuses of dominance relating to the water and wastewater sector, including the power to enforce directions to bring an infringement to an end and to impose fines of up to 10 per cent. of worldwide group-wide turnover of a Regulated Company for the infringement. Also any arrangement which infringes the Competition Act may be void and unenforceable and may give rise to claims for damages from third parties. A party to an anti-competitive agreement may also be able to seek relief from the other party if it was in a markedly weaker bargaining position than the other party when the contract was made or where the party seeking relief cannot bear significant responsibility for infringement of the Chapter I Prohibition.
The EA consultation document on the facilitation of trading of water abstraction licences (“Trading Water Rights - A Consultation Document” June 2003) considered the possibility of abuse by licence holders in a dominant position of an area who may seek to buy up all water rights available in that area to prevent competitors acquiring water rights. The EA considered that this potential problem could be dealt with by the EA assessing all trading applications in terms of reasonable need and for consistency with competition principles, and by Ofwat or the OFT as part of their statutory roles. As such it does not represent a change to the legal framework governing competition in the water industry.
107
Merger Regime As a result of changes made by the Enterprise Act and the Water Act, the OFT has a duty to refer to the Competition Commission mergers or proposed mergers between two or more water enterprises where the value of the turnover of the water enterprise being taken over, or the value of the turnover of each of the water enterprises belonging to the person making the takeover, exceeds £10 million. In determining whether such a matter operates, or may be expected to operate, against the public interest, the Competition Commission must assess whether the merger prejudices Ofwat’s ability to make comparisons between different water companies. If the Competition Commission decides there is a prejudicial outcome (i.e. that the merger has prejudiced, or may be expected to prejudice, the ability of Ofwat to make comparisons), it must decide whether action should be taken to remedy, mitigate or prevent that prejudice and, if so, what action. Remedies may be structural (total or partial prohibition of a proposed merger; total or partial divestiture of a completed acquisition) or behavioural, such as amendments to a Regulated Company’s licence (for instance regarding the provision of information) or a requirement to maintain separate management. In deciding on remedies, the Competition Commission has regard to any relevant customer benefits (in the form of lower prices, higher quality, greater choice or innovation) of the merger under consideration. The Competition Commission takes the final decision on remedial action, and this decision can be appealed to the CAT by any person sufficiently affected by the decision. Depending on the size of the parties involved, such mergers may require notification to the European Commission under the EU merger regime, although the Competition Commission may (protecting a national “legitimate interest”) still investigate the effect on the comparator principle.
In cases of an acquisition of a Regulated Company by a company which is not already a Regulated Company or where the special merger water regime does not otherwise apply, general merger control rules apply. These may call for discussion with the OFT as well as Ofwat. The OFT has the power to investigate any merger within the jurisdiction of the United Kingdom. The OFT must refer the transaction to the Competition Commission for further investigation if the arrangement could be expected to result in a substantial lessening of competition within any market or markets in the UK for goods or services. In its investigations, the OFT will consult with Ofwat.
The Secretary of State, in certain limited circumstances, may also refer a merger to the Competition Commission to investigate whether the arrangement could be expected to operate against the public interest. Depending on the size of the parties involved, such mergers may require notification to the European Commission under the EU’s merger regime.
Market Investigation Regime The Enterprise Act contains the power for the Competition Commission to investigate markets where the OFT (or, in some circumstances, a minister or Ofwat) has reasonable grounds for believing that competition in that market is not effective. The reference by the OFT, the relevant minister or Ofwat will describe the goods or services and will indicate the feature(s) that relate to such goods or services that it believes have adverse effects on competition. The Competition Commission will be responsible for remedies (which may include structural break up). However, where there are public interest considerations, the Secretary of State may intervene and may remedy any adverse effects in the public interest.
Customers’ Interests
General Ofwat is responsible for protecting the interests of customers. It monitors the performance and level of service of Regulated Companies and the implementation of a “guaranteed standards” scheme in respect of customer care.
Consumer Council for Water The Water Act introduced a new independent consumer council for water consumers (known as “CC Water”) whose role is to provide information of use to consumers and to promote the interests of all water consumers.
108
CC Water, which came into being on 1 October 2005, replaced WaterVoice, which had previously fulfilled a similar role. CC Water operates through 10 regional consumer council committees, which typically meet monthly and comprise a chair and about 10 members. The council comprises the national chair (currently Dame Yve Buckland), seven members who chair CC Water committees, four non-executive members and the chief executive (currently Tony Smith).
Guaranteed Standards The guaranteed standards scheme is underpinned by regulations made under sections 38(2) to (4), 95(2) to (4) and section 213 of the WIA, which prescribe standards of performance in connection with water and sewerage services in relation to matters such as the keeping of appointments with customers, dealing with enquiries and complaints from customers, giving notice of interruption of supply, installation of meters and flooding from sewers.
If a Regulated Company does not meet any of the prescribed standards, under the guaranteed standards scheme, the customer is entitled to compensation, normally in the region of £20 for domestic customers and £20 or £50 for business customers (although, in the case of sewer flooding, it can be up to £1,000) within 10 working days of the incident. The availability of such compensation is in addition to the availability of any other remedy the customer may have.
Unfair Trading Regulations The Unfair Trading Regulations, which came into force on 26 May 2008, introduce a general duty not to trade unfairly and seek to ensure that traders act honestly and fairly towards their customers. They apply to both business and consumer transactions. A trader which engages in unfair commercial practices (including misleading actions or omissions; knowingly or recklessly engaging in a practice that contravenes the requirements of professional diligence; or aggressive commercial practices) commits an offence under the regulations and could be liable to a fine or imprisonment not exceeding two years.
109
CHAPTER 7 SUMMARY OF THE FINANCING AGREEMENTS
Security Trust and Intercreditor Deed
General The intercreditor arrangements in respect of the SWS Financing Group (the “Intercreditor Arrangements”) are contained in the STID and the CTA. The Intercreditor Arrangements bind each of the Secured Creditors and each of the Obligors.
The Secured Creditors include the Class A Debt Providers, the Class B Debt Providers and the Mezzanine Facility Providers. Any new Authorised Credit Provider (or in respect of Bondholders, the Bond Trustee) will be required to accede to the STID and the CTA as a Class A Debt Provider, a Class B Debt Provider or a Mezzanine Facility Provider.
Unsecured creditors are not and will not become parties to the Intercreditor Arrangements and, although ranking behind the Secured Creditors in an administration or other enforcement, will have unfettered, independent rights of action in respect of their debts. However, the aggregate amount of unsecured Financial Indebtedness is restricted under the Common Terms Agreement.
The purpose of the Intercreditor Arrangements is to regulate, among other things: (i) the claims of the Secured Creditors; (ii) the exercise, acceleration and enforcement of rights by the Secured Creditors; (iii) the rights of the Secured Creditors to instruct the Security Trustee; (iv) the rights of the Secured Creditors during a Standstill Period (see “Standstill” below); (v) the Entrenched Rights and the Reserved Matters of the Secured Creditors; and (vi) the giving of consents and waivers and the making of modifications to the Finance Documents.
The Intercreditor Arrangements provide for the ranking in point of payment of the claims of the Secured Creditors and for the subordination of all claims among the SWS Financing Group (other than claims in respect of the Issuer/SWS Loan Agreements funded through the raising of Class A Debt, Class B Debt and Mezzanine Debt).
Undertakings of Secured Creditors Pursuant to the terms of the STID, each Secured Creditor (other than the Security Trustee) undertakes that it will not, except as expressly contemplated in the CTA, unless the Majority Creditors or, where applicable, the Super Majority Creditors otherwise agree:
(a) permit or require any Obligor to discharge any of the Secured Liabilities owed to it, save to the extent permitted by the STID, including (i) the Payment Priorities and (ii) in the case of the Mezzanine Debt and prepayments of other Financial Indebtedness (other than out of the proceeds of Permitted Financial Indebtedness) the Restricted Payment Condition;
(b) permit or require any Obligor to pay, prepay, repay, redeem, purchase, early or voluntarily terminate or otherwise acquire any of the Secured Liabilities owed to it, save to the extent permitted by the CTA or the STID including pursuant to a Permitted Lease Termination or a Permitted Hedge Termination, pursuant to a provision for prepayment upon illegality or, in the case of Mezzanine Debt and prepayments of other Financial Indebtedness (other than out of the proceeds of Permitted Financial Indebtedness), if the Restricted Payment Condition is satisfied;
(c) take, accept or receive the benefit of any Security Interest, guarantee, indemnity or other assurance against financial loss from any of the Obligors in respect of any of the Secured Liabilities owed to it, except the Security and the Financial Guarantees or pursuant to the terms of the Finance Documents;
110
(d) take or receive from any of the Obligors by cash receipt, set-off, any right of combination of accounts or in any other manner whatsoever (other than set-off in relation to amounts in the Operating Accounts which are owed to the Account Bank or in relation to Standby Drawings owed to a Liquidity Facility Provider under a Liquidity Facility Agreement), the whole or any part of the Secured Liabilities owed to it, save to the extent permitted by the CTA or the STID; or
(e) except as described in “Modifications, Consents and Waivers” below, agree to any modification to, or consent or waiver under or in respect of, any term of any Finance Document to which it is a party.
Undertakings of Obligors Pursuant to the terms of the STID, each Obligor undertakes that it will not, unless the Majority Creditors or, where applicable, the Super-Majority Creditors otherwise agree:
(i) discharge any of the Secured Liabilities owed by it, save to the extent contemplated in paragraph (a) of “Undertakings of Secured Creditors” above;
(ii) pay, prepay, repay, redeem, purchase, early or voluntarily terminate or otherwise acquire any of the Secured Liabilities owed by it, save to the extent contemplated in paragraph (b) of “Undertakings of Secured Creditors” above;
(iii) create or permit to subsist any Security Interest over any of its assets for, or any guarantee, indemnity or other assurance against financial loss in respect of, any of the Secured Liabilities owed by it, except the Security and the Financial Guarantees or pursuant to the terms of the Finance Documents;
(iv) (except as referred to in paragraph (d) of “Undertakings of Secured Creditors” above) discharge any of the Secured Liabilities by cash payment, set-off, any right of combination of accounts or in any other manner whatsoever, save to the extent permitted by the CTA or the STID;
(v) without the consent of the Security Trustee or, where applicable, each relevant Secured Creditor (as described in “Modifications, Consents and Waivers” below), agree to any modification to, or consent or waiver under or in respect of, any term of any Finance Document to which it is a party; or
(vi) take or omit to take any action whereby any subordination contemplated by the STID may be impaired.
Ranking of Secured Liabilities The underlying principle of the Intercreditor Arrangements is that at all times the Class A Debt ranks in point of payment prior to any payment in respect of the Class B Debt and the Mezzanine Debt, the Class B Debt ranks in point of payment prior to the Mezzanine Debt and the Senior Mezzanine Debt ranks in point of payment prior to the Junior Mezzanine Debt (including in each case both prior to and during any Standstill Period, after acceleration of the Secured Liabilities and upon any enforcement of the Security), see Chapter 5 “Risk Factors” under “Subordination of the Class B Bonds” for further details. Prior to a Standstill Period payment dates for Class A Debt, Class B Debt and Mezzanine Debt may fall on different dates.
Modifications, Consents and Waivers Subject to the Entrenched Rights and Reserved Matters (see “Entrenched Rights and Reserved Matters” below), the Security Trustee shall only agree to any modification of or grant any consent or waiver under the Finance Documents or (subject to restrictions during a Standstill Period) take Enforcement Action with the consent of or if so instructed by the Majority Creditors or, in certain cases, Super-Majority Creditors. Not all proposals which require the consent of the Majority Creditors or, as the case may be, Super-Majority Creditors will be sent to all Secured Creditors (or their Secured Creditor Representatives, as the case may be).
Subject to the Entrenched Rights and Reserved Matters (see “Entrenched Rights and Reserved Matters” below), the Security Trustee may make modifications to the Finance Documents without the consent of any
111
other Secured Creditor if such modifications are to correct manifest errors or are of a formal, minor or technical nature.
Class A Debt Instructing Group Both prior to and during any Standstill Period, after acceleration of the Secured Liabilities and upon any enforcement of the Security prior to repayment in full of the Class A Debt, only the Qualifying Class A Debt Providers are eligible to exercise the rights of the Majority Creditors and, where appropriate, Super-Majority Creditors. Decisions of the Majority Creditors and, where applicable, Super-Majority Creditors will bind all of the Secured Creditors in all circumstances, save for certain Entrenched Rights and Reserved Matters that are fundamental to particular Secured Creditors (see “Entrenched Rights and Reserved Matters” below).
The Qualifying Class A Debt Providers will exercise their rights through the following representatives which will together be entitled to vote on certain proposals as part of the “Class A Debt Instructing Group” or the “Class A DIG”. The Class A DIG is comprised of the following representatives (each, a “Class A DIG Representative”):
(a) in respect of each Sub-Class of Class A Wrapped Bonds or other Class A Wrapped Debt (if no FG Event of Default has occurred and is continuing in respect of the relevant Financial Guarantor), such Financial Guarantor;
(b) in respect of each Sub-Class of Class A Wrapped Bonds (after an FG Event of Default has occurred and is continuing in respect of the Financial Guarantor of those Class A Wrapped Bonds) and each Sub-Class of Class A Unwrapped Bonds, the Bond Trustee;
(c) in respect of the Initial RCF Agreement, the Initial RCF Agent, in respect of the Initial Term Facility, Artesian II and, in respect of the Second Artesian Term Facility, Financial Security Assurance (U.K.) Limited;
(d) in respect of the Second Revolving Credit Facility, RBS as the agent under the Second Revolving Credit Facility; and
(e) in respect of any other Secured Liabilities of the type referred to in paragraphs (a) to (c) above (excluding liabilities in respect of any Hedging Agreements or Liquidity Facilities) or (with the approval of the Majority Creditors) other types of Secured Liabilities that rank pari passu with all other Class A Debt, the relevant representative appointed under the terms of the relevant Finance Document and named in the STID or the relevant Accession Memorandum to the STID and the CTA as the Class A DIG Representative.
Each Class A DIG Representative is required to provide an indemnity to the Security Trustee each time it votes as part of the Class A DIG irrespective of whether it is a Majority Creditor.
Unless a Default Situation has occurred and is continuing and no Emergency Instruction Notice has been served (see “Emergency Instruction Procedure” below), the Bond Trustee shall not be entitled to convene a meeting of holders of any Series, Class or Sub-Class of Bonds to consider any proposal to be voted on by the Class A DIG except where such proposal is the subject of an Entrenched Right or a Reserved Matter in respect of such Series, Class or Sub-Class.
Decisions of the Majority Creditors and, where appropriate, Super-Majority Creditors will be determined by votes on a pound for pound basis (based on the Outstanding Principal Amount of the Qualifying Class A Debt voted by the Class A DIG Representatives). Subject to Entrenched Rights and Reserved Matters, the Security Trustee will be entitled to act on the instructions of the Majority Creditors or, as the case may be, Super- Majority Creditors of those Class A DIG Representatives which have actually voted by the specified date for voting, which date must be not less than 10 business days (or in certain circumstances five business days) after the date the STID Directions Request is deemed to be given (or, where the Bond Trustee is a DIG Representative and a Default Situation is continuing (subject to the Emergency Instruction Procedure — see
112
“Emergency Instruction Procedure” below), such later date (not later than two months after such date) as is requested of the Security Trustee by the Bond Trustee should the Bond Trustee consider it necessary to convene a meeting of any one or more Series, Class or Sub-Class of Bondholders to seek directions) or, if earlier, as soon as Class A DIG Representatives in respect of more than 50 per cent. (or 66⅔ per cent. for Super-Majority Creditor decisions) of the Qualifying Class A Debt have voted in favour of the relevant proposal.
Class B Debt Instructing Group Following repayment in full of the Class A Debt, the Qualifying Class B Debt Providers will be eligible to exercise the rights of the Majority Creditors and, where appropriate, Super-Majority Creditors. After repayment in full of the Class A Debt, decisions of such Majority Creditors or, as the case may be, Super- Majority Creditors will bind all of the Secured Creditors in all circumstances, save for certain Entrenched Rights and Reserved Matters that are fundamental to particular Secured Creditors. See “Entrenched Rights and Reserved Matters” below.
The Qualifying Class B Debt Providers will exercise their rights through a group of representatives which will together be entitled to vote on certain proposals as part of the “Class B Debt Instructing Group” or the “Class B DIG”. The Class B DIG will be comprised of the following representatives (each, a “Class B DIG Representative”):
(a) in respect of each Sub-Class of Class B Wrapped Bonds (if no FG Event of Default has occurred and is continuing in respect of the relevant Financial Guarantor), such Financial Guarantor;
(b) in respect of each Sub-Class of Class B Wrapped Bonds (after an FG Event of Default has occurred and is continuing in respect of the Financial Guarantor of those Class B Wrapped Bonds) and each Sub-Class of Class B Unwrapped Bonds, the Bond Trustee; and
(c) in respect of any other Secured Liabilities of the type referred to in paragraphs (a) and (b) above (excluding liabilities in respect of any Currency Hedging Agreements in relation to Class B Debt) or (with the approval of the Majority Creditors) other types of Secured Liabilities that rank pari passu with all other Class B Debt, the relevant representative appointed under the terms of the relevant Finance Document and named in the relevant Accession Memorandum to the STID as the Class B DIG Representative.
Each Class B DIG Representative is required to provide an indemnity to the Security Trustee each time it votes as part of the Class B DIG irrespective of whether it is a Majority Creditor.
Unless a Default Situation has occurred and no Emergency Instruction Notice has been served (see “Emergency Instruction Procedure” below) and is continuing, the Bond Trustee is not entitled to convene a meeting of holders of any Series, Class or Sub-Class of Bonds to consider any proposal to be voted on by the Class B DIG except where such proposal is the subject of an Entrenched Right or a Reserved Matter in respect of such Series, Class or Sub-Class.
Decisions of the Majority Creditors and, where appropriate, Super-Majority Creditors will be determined by votes on a pound for pound basis (based on the Outstanding Principal Amount of the Qualifying Class B Debt voted by the Class B DIG Representatives). Subject to Entrenched Rights and Reserved Matters, the Security Trustee will be entitled to act on the instructions of the Majority Creditors or, as the case may be, Super- Majority Creditors of those Class B DIG Representatives which have actually voted by the specified date for voting, which date must be not less than 10 business days (or in certain circumstances five business days) after the date the STID Directions Request is deemed to be given (or, where the Bond Trustee is a DIG Representative and a Default Situation is continuing (subject to the Emergency Instruction Procedure — see “Emergency Instruction Procedure” below), such later date (not later than two months after such date) as is requested of the Security Trustee by the Bond Trustee should the Bond Trustee consider it necessary to convene a meeting of any one or more Series, Class or Sub-Class of Bondholders to seek directions) or, if
113
earlier, as soon as Class B DIG Representatives in respect of more than 50 per cent. (or 66⅔ per cent. for Super-Majority Creditor decisions) of the Qualifying Class B Debt have voted in favour of the relevant proposal.
Senior Mezzanine and Junior Mezzanine Debt Instructing Groups Following repayment in full of the Class A Debt and the Class B Debt, the Senior Mezzanine Debt Providers will be eligible to exercise the rights of the Majority Creditors and, where appropriate, the Super-Majority Creditors. Following repayment in full of the Class A Debt, the Class B Debt and the Senior Mezzanine Debt, the Junior Mezzanine Debt Providers will be eligible to exercise the rights of the Majority Creditors and, where appropriate, Super-Majority Creditors.
Voting by the Bond Trustee as DIG Representative of the Bondholders Where the Bond Trustee acts as the DIG Representative of some or all of the Wrapped Bondholders (following the occurrence of an FG Event of Default which is continuing in respect of the relevant Financial Guarantor of those Wrapped Bonds) and/or the Unwrapped Bondholders, the Bond Trustee may, both prior to a Default Situation and/or whilst a Default Situation is continuing, in its absolute discretion, vote on a STID Proposal or a DIG Proposal (without reference to any Bondholders) in respect of the aggregate Outstanding Principal Amount of some or all of such Sub-Classes of Bonds, but shall not, prior to a Default Situation, be entitled to convene a meeting of any Series, Class or Sub-Class of Bondholders to seek directions (except in respect of an Entrenched Right or Reserved Matter of such Series, Class or Sub-Class of Bondholders).
Additionally whilst a Default Situation is continuing, where the Bond Trustee acts as the DIG Representative in respect of Bonds, the Bond Trustee shall not be entitled to convene a meeting of the Bondholders to direct the Security Trustee in accordance with an extraordinary resolution of the relevant Sub-Class of Bonds after the presentation of a valid Emergency Instruction Notice pursuant to the terms of the STID. See “Emergency Instruction Procedure” below.
Emergency Instruction Procedure Whilst a Default Situation is subsisting, certain decisions and instructions may be required in a timeframe which does not allow the Bond Trustee to convene Bondholder meetings. To cater for such circumstances, the Intercreditor Arrangements provide for an emergency instruction procedure (the “Emergency Instruction Procedure”) which is subject to Entrenched Rights and Reserved Matters. The Security Trustee will be required to act upon instructions contained in an emergency instruction notice (an “Emergency Instruction Notice”). An Emergency Instruction Notice must be signed by DIG Representatives (the “EIN Signatories”) representing 66⅔ per cent. or more of the aggregate Outstanding Principal Amount of the Qualifying Class A Debt (or following the repayment in full of the Class A Debt, the Qualifying Class B Debt) after excluding the proportion of Qualifying Debt in respect of which the Bond Trustee is the DIG Representative and in respect of which the Bond Trustee in its absolute discretion has not voted. The Emergency Instruction Notice must specify the emergency action which the Security Trustee is being instructed to take and must certify that in the EIN Signatories’ reasonable opinion, unless such action is taken within the timeframe specified in the Emergency Instruction Notice, the interests of the EIN Signatories would be materially prejudiced.
Hedge Counterparties Each Hedge Counterparty is or will be a Secured Creditor party to the STID and the CTA and each Hedging Agreement to hedge the currency of any Class A Debt or to hedge interest rates constitutes or will constitute Class A Debt or, if entered into to hedge the currency of any Class B Debt, Class B Debt.
The Hedge Counterparties will not form part of the Class A DIG or, in the case of any Currency Hedging Agreement in relation to Class B Debt, the Class B DIG. However, except in relation to certain amounts payable by the Issuer under any Currency Hedging Agreement in relation to Class B Debt, all fees, interest and principal payable by the Issuer to the Hedge Counterparties will rank in the Payment Priorities senior to
114
or pari passu with interest or principal payments on the Class A Bonds. See “Cash Management” and “Hedging Agreements” below.
Liquidity Facility Providers Each Liquidity Facility Provider is or will be a Secured Creditor party to the STID and the CTA and each Liquidity Facility Agreement constitutes or will constitute Class A Debt.
The Liquidity Facility Providers will not form part of the Class A DIG. However, fees, interest and principal of the Liquidity Facility Providers will rank in the Payment Priorities senior to interest and principal payments on the Class A Bonds. See “Cash Management” and “The Liquidity Facilities” below.
Finance Lessors Each Finance Lessor will be a Secured Creditor party to the STID and all amounts arising under the Finance Leases will constitute Class A Debt.
Amounts due and payable under the Finance Leases are dealt with in “Cash Management” below.
Standstill The STID provides for an automatic standstill of the claims of the Secured Creditors against SWS and the Issuer (the “Standstill”) immediately following notification to the Security Trustee of an Event of Default (other than an Event of Default under any Hedging Agreement with respect to a Hedge Counterparty under such Hedging Agreement) and for so long as any Class A Debt and/or Class B Debt is outstanding.
The Standstill is designed to reduce or postpone the likelihood of a Special Administration Order being made against SWS on the grounds of its insolvency or otherwise. Although not binding on unsecured and trade creditors and hence potentially giving such unsecured and trade creditors a position of greater strength upon an Event of Default, it is intended to enable SWS to continue as a going concern and to allow time for the financial condition of SWS to be restored.
During the Standstill Period:
(a) none of the Secured Creditors will be entitled to give any instructions to the Security Trustee to take any Enforcement Action (but without prejudice to the ability of the Secured Creditors to demand payment) in relation to the Security granted by the Issuer or SWS;
(b) the Security granted by SWSGH and SWSH may be enforced at any time by the Security Trustee at the direction of the Majority Creditors except in the case of a Standstill Period which has commenced as a result of the occurrence of the Event of Default pursuant to a rating downgrade of the Bonds (no other Event of Default having occurred and being outstanding), in which case such Security may only be enforced at any time following the date which is three months from the date of commencement of the Standstill Period provided that such Event of Default is continuing at such time;
(c) save as provided in paragraphs (a) and (b) above, no Enforcement Action may be taken by any Secured Creditor; and
(d) any monies received by SWS or the Issuer will be applied in accordance with the cash management provisions contained in the CTA (see “Cash Management” below) and in accordance with the Payments Priorities (see “Cash Management — Debt Service Payment Account” below).
Notwithstanding the Standstill, the Secured Creditors will be entitled to accelerate their claims to the extent required to apply proceeds of enforcement of the Share Pledges provided by SWSH and SWSGH under the Security Documents.
The period of the Standstill in respect of any Event of Default relating to SWS and/or the Issuer (the “Standstill Period”) will be 18 months unless the Standstill Period is extended beyond 18 months (see
115
“Standstill Extension” below) or any of the following occur prior to the expiry of the relevant Standstill Period:
(a) an order is made for the Special Administration of SWS or any steps are taken to commence insolvency proceedings against the Issuer or SWS other than proceedings that are commenced by the Security Trustee;
(b) (during the first 18 months of the Standstill Period) Class A DIG Representatives in respect of 66⅔ per cent. or more of the aggregate Outstanding Principal Amount of the Qualifying Class A Debt or (following the repayment in full of the Class A Debt) Class B DIG Representatives in respect of 66⅔ per cent. or more of the aggregate Outstanding Principal Amount of the Qualifying Class B Debt vote to terminate the Standstill Period and (after the first 18 months) the date on which the Standstill Period terminates (see “Standstill Extension” below);
(c) the waiver or remedy of the relevant Event of Default giving rise to the Standstill Period; or
(d) the Security Trustee notifies SWS and each Secured Creditor (or its DIG Representative) that notice by any Secured Creditor of the occurrence of the relevant Event of Default has been revoked.
The occurrence of a Standstill will not of itself prevent the Issuer drawing under the Liquidity Facilities.
Upon termination of a Standstill Period (except by virtue of the matters referred to in paragraphs (c) and (d) above), each Secured Creditor will be entitled to exercise all rights which may be available to it under any Finance Document to which it is a party (other than any Security Document) including directing the Security Trustee to take Enforcement Action.
Standstill Extension The Standstill Period shall automatically be extended beyond 18 months:
(a) for a further 120 days unless Class A DIG Representatives in respect of 50 per cent. or more of the aggregate Outstanding Principal Amount of Qualifying Class A Debt vote at any time prior to or during such further 120 days to terminate the Standstill Period;
(b) following the period referred to in paragraph (a) above, for a further 60 days unless Class A DIG Representatives in respect of 33 per cent. or more of the aggregate Outstanding Principal Amount of Qualifying Class A Debt vote at any time prior to or during such further 60 days to terminate the Standstill Period; and
(c) following the period referred to in paragraph (b) above, for successive periods each of 60 days unless Class A DIG Representatives in respect of 10 per cent. or more of the aggregate Outstanding Principal Amount of Qualifying Class A Debt vote at any time prior to or during such further 60 days to terminate the Standstill Period and a vote shall be taken of the relevant Class A DIG Representatives on the expiry of each subsequent period of 60 days for so long as the Standstill Period continues as to whether the Standstill Period should continue for a further period of 60 days.
The Bond Trustee shall not form part of the Class A DIG in respect of any vote to terminate the Standstill Period, unless directed or requested to vote in such manner (i) by an Extraordinary Resolution of the relevant Sub-Class of Class A Wrapped Bonds (following the occurrence of an FG Event of Default which is continuing in respect of the relevant Financial Guarantor of such Sub-Class of Class A Wrapped Bonds) or Class A Unwrapped Bonds or (ii) in writing by Bondholders holding not less than 25 per cent. of the Outstanding Principal Amount of the relevant Sub-Class of Class A Bonds.
When the Class A Debt has been fully repaid, the rights to terminate the Standstill Period as described above shall be vested in the Class B DIG Representatives.
116
The period of Standstill in respect of any Event of Default other than an Event of Default relating to SWS and/or the Issuer will terminate upon the earlier of (a) the date of the waiver or remedy of the relevant Event of Default giving rise to the Standstill Period and (b) the date on which the Security Trustee notifies SWS and each Secured Creditor (or its DIG Representative) that notice by any Secured Creditor of the occurrence of the relevant Event of Default has been revoked.
Enforcement Following an Event of Default and for so long as it is continuing, the Majority Creditors may direct the Security Trustee to enforce the Security created by SWSGH and SWSH; following the termination of a Standstill Period (except under paragraph (c) or (d) of “Standstill” above), the Majority Creditors may direct the Security Trustee to enforce the Security created by SWS and the Issuer.
Subject to certain matters and to certain exceptions, following an enforcement, any proceeds of enforcement or other monies held by the Security Trustee under the STID (excluding monies credited to the Excluded Accounts) will be applied by the Security Trustee in accordance with the Payment Priorities (see “Debt Service Payment Account” below).
The holders of the SWS Preference Shares and the Mezzanine Facility Providers are subject to certain call option arrangements under which they will be required (subject to certain conditions) to sell their SWS Preference Shares (other than the Class A2 Preference Shares) or, as the case may be, their Mezzanine Debt in the event that the Security Trustee or any receiver appointed by it sells the ordinary shares in SWSH or SWS following the enforcement of the Security created by SWSGH or SWSH. In this event, the holders of the SWS Preference Shares will be required to sell their shares (other than the Class A2 Preference Shares) to the person that acquires the ordinary shares in SWSH or SWS on an enforcement of the Security created by SWSGH or SWSH (or to any nominee of such person) for a price to be determined in accordance with the SWS Preference Share Deed (see “SWS Preference Shares” below) and the Mezzanine Facility Providers will be required, if any of their Mezzanine Debt remains outstanding following the application of the proceeds of such enforcement of Security pursuant to the Payment Priorities, to sell their debt at its market value (likely to be a nominal amount). The rights of the holders of the Class A2 Preference Shares shall be deferred upon any sale of the other SWS Preference Shares pursuant to these call option arrangements.
Excluded Accounts Although the Issuer has pursuant to the Security Agreement created first fixed charges over the Excluded Accounts in favour of the Security Trustee, the Security Documents provide that, on and following an Acceleration of Liabilities (other than a Permitted Lease Termination, Permitted Hedge Termination or Permitted Share Pledge Acceleration), all monies held in the Issuer’s O&M Reserve Account and the Debt Service Reserve Account will be held by the Security Trustee on trust for the relevant Liquidity Facility Providers whose commitments have been drawn to fund the Issuer’s O&M Reserve Account or, as the case may be, the Debt Service Reserve Account and in the proportions that their respective drawn amounts under the relevant O&M Reserve Facility Agreement or, as the case may be, DSR Liquidity Facility Agreement bear to the balance on the O&M Reserve Account or, as the case may be, the Debt Service Reserve Account.
Accession of Additional Secured Creditors The STID requires that, to the extent that SWS and/or the Issuer wishes any Authorised Credit Provider (or, in respect of Bonds, its Secured Creditor Representative) or other person to obtain the benefit of the Security, such Authorised Credit Provider or other person (other than Bondholders) must sign an Accession Memorandum whereby it agrees to be bound by the terms of the STID and the CTA, including those provisions which prohibit individual Secured Creditors from taking action without the consent of the Majority Creditors or, where appropriate, the Super-Majority Creditors. Holders of SWS Preference Shares who, by virtue of the terms of the SWS Preference Shares, become holders of Subordinated Debt upon the conversion of the SWS Preference Shares into Subordinated Debt may elect to accede to (or cause its trustee to accede to) the terms of the STID and the CTA as a Secured Creditor for the reasons described immediately above.
117
Activities of the Security Trustee Subject to its Entrenched Rights and Reserved Matters and certain exceptions, the Security Trustee will only be required to take any action if instructed to do so by the Majority Creditors or, in particular cases, other specified parties and indemnified to its satisfaction.
Subject to certain exceptions, when granting any consent or waiver or exercising any power, trust, authority or discretion relating to or contained in the STID, the Finance Documents or any ancillary documents, the Security Trustee will act in accordance with its sole discretion (where granted such right) or as directed, requested or instructed by or subject to the agreement of the Majority Creditors or, where appropriate, the Super-Majority Creditors or, in particular cases, other specified parties and in accordance with the provisions of the STID.
Super-Majority Creditor Decisions Whilst most of the decisions relating to any waiver, consent or modification under or in respect of a Finance Document require the approval of the Majority Creditors (subject always to the Entrenched Rights and Reserved Matters of Secured Creditors), the STID provides that a limited number of decisions (relating to the ability of the Obligors to raise further Financial Indebtedness or create Security Interests) require the approval of the Super-Majority Creditors.
Entrenched Rights and Reserved Matters Modifications, consents and waivers will be agreed by the Security Trustee, in accordance with votes of the Majority Creditors or, where appropriate, Super-Majority Creditors, subject to Entrenched Rights and Reserved Matters. Such modifications, consents and waivers will be binding on all of the Secured Creditors, subject to Entrenched Rights and Reserved Matters. No Entrenched Right or Reserved Matter will operate to override the provisions contained in the CTA which allow SWS (following a Periodic Review or as a result of any material change in the regulation of the water industry in the United Kingdom) to amend any financial ratio contained within the covenants, Trigger Events or Events of Default provided that each Financial Guarantor and the Security Trustee (acting on the instructions of the Majority Creditors) agree and the relevant ratings set out in the definition of Rating Requirement (in relation to the Class A Bonds) and the ratings ascribed to the Class B Bonds at the time of their issue have been affirmed by all Rating Agencies then rating the Class A Bonds and/or the Class B Bonds as applicable.
Lists of Entrenched Rights and Reserved Matters are contained in “Entrenched Rights” and “Reserved Matters” below.
Entrenched Rights Entrenched Rights are rights that cannot be modified or waived in accordance with the STID without the consent of the Secured Creditor having the Entrenched Right.
The Entrenched Rights of the Class A Debt Providers include, subject to certain provisions of the CTA including the right to amend financial ratios following a Periodic Review or as a result of a material change in the regulation of the water industry in the United Kingdom, any proposed modification to, or consent or waiver under or in respect of, the STID or any other Finance Document which:
(a) the relevant Class A Debt Provider (or, where applicable, its Secured Creditor Representative) has demonstrated to the satisfaction of the Security Trustee would increase or adversely modify its obligations or liabilities under or in connection with the STID or any other Finance Document;
(b) (i) would release any of the Security (unless equivalent replacement security is taken at the same time) unless such release is permitted in accordance with the terms of the STID and the relevant Security Document or (ii) would alter the rights of priority of, or the enforcement by, the relevant Class A Debt Provider (or, where applicable, its Secured Creditor Representative) under the Security Documents other than as expressly contemplated therein;
118
(c) would change or would relate to the Payment Priorities;
(d) would change or would relate to the Entrenched Rights or the Reserved Matters or, where applicable, the relevant Class A Debt Provider’s Entrenched Rights or Reserved Matters;
(e) would change or would relate to (i) the definitions of “Class A DIG”, “Class A DIG Representatives”, “DIG Proposal”, “DIG Directions Request”, “Majority Creditors”, “Restricted Payment”, “Restricted Payment Condition”, “Qualifying Class A Debt”, “Super-Majority Creditors” or “Voted Qualifying Class A Debt”, (ii) those matters expressly requiring the consent, approval or agreement of, or directions or instructions from, or waiver by the Majority Creditors, Super-Majority Creditors or the Security Trustee or (iii) the percentages of aggregate Outstanding Principal Amount of Qualifying Class A Debt required to terminate a Standstill;
(f) would delay the date fixed for payment of principal, interest or Make-Whole Amount in respect of the relevant Class A Debt Provider’s Class A Debt or of any fees or premia in respect thereof or would reduce the amount of principal, interest or Make-Whole Amount payable in respect of such Class A Debt or the amount of any fees or premia in respect thereof;
(g) would bring forward the date fixed for payment of principal, interest or Make-Whole Amount in respect of Class A Debt or Class B Debt or any fees or premia in respect thereof or would increase the amount of principal, interest or Make-Whole Amount payable on any date in respect of Class A Debt or Class B Debt or any fees or premia in respect thereof;
(h) would result in the exchange of the relevant Class A Debt Provider’s Class A Debt for, or the conversion of such Class A Debt into, shares, bonds or other obligations of any other person;
(i) would change or would relate to the currency of payment due under the relevant Class A Debt Provider’s Class A Debt (other than due to the United Kingdom joining the euro);
(j) (subject to paragraph (k) below) would change any Event of Default or any Trigger Event relating to financial ratios or credit rating downgrade;
(k) would relate to the waiver of the non-payment Event of Default in respect of any Obligor or Events of Default or Trigger Events relating to non-payment, credit rating downgrade or financial ratios or the making of Restricted Payments (see “Common Terms Agreement – Trigger Events” and “Events of Default” below);
(l) would change or would relate to the rights of the relevant Class A Debt Provider to receive any sums owing to it for its own account in respect of premia, fees, costs, charges, liabilities, Taxes, damages, proceedings, claims and demands in relation to any Finance Document to which it is a party (excluding, for the avoidance of doubt, the principal, interest or Make-Whole Amount payable to the relevant Class A Debt Provider); or
(m) would change or would relate to any existing obligation of an Obligor to gross up any payment in respect of the relevant Class A Debt Provider’s Class A Debt in the event of the imposition of withholding taxes.
The Entrenched Rights of the Class B Debt Providers include, subject to certain provisions of the CTA including the right to amend financial ratios following a Periodic Review or as a result of a material change in the regulation of the water industry in the United Kingdom, any proposed modification to, or consent or waiver under or in respect of, the STID or any other Finance Document which:
(a) the relevant Class B Debt Provider (or, where applicable, its Secured Creditor Representative) has demonstrated to the satisfaction of the Security Trustee would increase or adversely modify its obligations or liabilities under or in connection with the STID or any other Finance Document;
119
(b) (i) would release any of the Security (unless equivalent replacement security is taken at the same time) unless such release is permitted in accordance with the terms of the STID and the relevant Security Document or (ii) would alter the rights of priority of or the enforcement by the relevant Class B Debt Provider (or, where applicable, its Secured Creditor Representative) under the Security Documents other than as expressly contemplated therein;
(c) would change or would relate to the Payment Priorities;
(d) would change or would relate to the Entrenched Rights or the Reserved Matters or, where applicable, the relevant Class B Debt Provider’s Entrenched Rights or Reserved Matters;
(e) would change or would relate to (i) the definitions of “Class B DIG”, “Class B DIG Representatives”, “DIG Proposal”, “DIG Directions Request”, “Majority Creditors”, “Restricted Payment”, “Restricted Payment Condition”, “Super-Majority Creditors”, “Qualifying Class B Debt” or “Voted Qualifying Class B Debt”, (ii) those matters expressly requiring the consent, approval or agreement of, or directions or instructions from, or waiver by the Majority Creditors or the Security Trustee or (iii) the percentages of aggregate Outstanding Principal Amount of Qualifying Class B Debt required to terminate a Standstill;
(f) would delay the date fixed for payment of principal, interest or Make-Whole Amount in respect of the relevant Class B Debt Provider’s Class B Debt or any fees or premia in respect thereof or would reduce the amount of principal, interest or Make-Whole Amount payable on any date in respect of such Class B Debt or any fees or premia in respect thereof;
(g) would bring forward the date fixed for payment of principal, interest or Make-Whole Amount in respect of Class A Debt or Class B Debt or any fees or premia in respect thereof or would increase the amount of principal, interest or Make-Whole Amount payable on any date in respect of Class A Debt or Class B Debt or any fees or premia in respect thereof;
(h) would result in the exchange of the relevant Class B Debt Provider’s Class B Debt for, or the conversion of such Class B Debt into, shares, bonds or other obligations of any other person;
(i) would change or would relate to the currency of payment under the relevant Class B Debt Provider’s Class B Debt (other than due to the United Kingdom joining the euro);
(j) (subject to paragraph (k) below) would change any Event of Default or any Trigger Event relating to financial ratios or credit rating downgrade;
(k) would relate to the waiver of the non-payment Event of Default in respect of any Obligor or Events of Default or Trigger Events relating to non-payment, credit rating downgrade or financial ratios or the making of Restricted Payments (see “Common Terms Agreement – Trigger Events” and “Events of Default” below);
(l) would change or would relate to the rights of the relevant Class B Debt Provider to receive any sums owing to it for its own account in respect of premia, fees, costs, charges, liabilities, Taxes, damages, proceedings, claims and demands in relation to any Finance Document to which it is a party (excluding, for the avoidance of doubt, the principal, interest or Make-Whole Amount payable to the relevant Class B Debt Provider); or
(m) would change or would relate to any existing obligation of an Obligor to gross up any payment in respect of the relevant Class B Debt Provider’s Class B Debt in the event of the imposition of withholding taxes.
The Entrenched Rights of the Finance Lessors include, in addition to the Entrenched Rights of the Class A Debt Providers set out above, any proposed modification to, or consent or waiver under or in respect of, the STID or any other Finance Document which would change or relate to:
120
(a) any sale, transfer or other disposal (whether deemed or otherwise) of any of the Equipment;
(b) the affixing of any Equipment to any land or building to which SWS or the Issuer (as applicable) does not have an interest in such land for the purposes of the Capital Allowances Act 2001;
(c) the creation or subsistence of any encumbrance, lien, mortgage or other Security Interest over any Equipment;
(d) any of the covenants or representations and warranties set out in the Finance Documents which relate to the maintenance or condition of the Equipment;
(e) any provision(s) contained in the Finance Documents pertaining to any damage, destruction or total loss of any of the Equipment;
(f) any elections filed with HM Revenue and Customs by SWS or the Issuer (as applicable) and any Finance Lessor under the Finance Leases pursuant to Sections 177 and/or 227 of the Capital Allowances Act 2001 in respect of the Equipment and the relevant Finance Lessor’s expenditure on the Equipment;
(g) the provisions relating to the calculation of rental payments and/or sums due upon termination of the leasing of any Equipment; and
(h) any changes to the Entrenched Rights of the Finance Lessors set out in paragraphs (a) to (g) above.
Entrenched Rights of the Mezzanine Facility Providers The Mezzanine Facility Providers enjoy some of the same Entrenched Rights as apply to the Class B Debt Providers insofar as is necessary to protect the fundamental terms of their investment. In addition:
(a) for so long as no Default has occurred and is continuing, no modification can be made which would have the effect of changing or supplementing any of the provisions contained in Paragraph 37 (Restricted Payments) of Part 3 of Schedule 5 (Covenants) to the Common Terms Agreement; any of the Trigger Events contained in Part 1 of Schedule 6 (Trigger Events) to the Common Terms Agreement; any of the remedies to Trigger Events contained in Part 3 of Schedule 6 (Trigger Events) to the Common Terms Agreement; or any of the Events of Default set out in Schedule 7 (Events of Default) to the Common Terms Agreement, in each case where the effect of such change or supplement would or might reasonably be expected to be adverse to the interests of a Mezzanine Facility Provider; or
(b) unless and until (i) an Event of Default has occurred and is continuing or (ii) a Trigger Event has occurred and is continuing and a Remedial Plan has concluded that the failure to raise new Financial Indebtedness would or could reasonably be expected to lead to an Event of Default and provided that the Security Trustee has received an Entrenched Rights or Reserved Matters Notice from any Mezzanine Facility Provider (or its Secured Creditor Representative), no modification to, or consent or waiver under or in respect of, any term of the STID and/or any other Finance Document will be effective if the proposed modification, consent or waiver would permit the raising of new Financial Indebtedness by the SWS Financing Group to the extent that, as a result, the aggregate of the Senior Net Indebtedness and any other net indebtedness ranking in point of priority senior to the Senior Mezzanine Debt would exceed 90 per cent. of RCV,
unless the Security Trustee has received written consent to such modification, consent or waiver from at least 66⅔ per cent. by value of Mezzanine Facility Providers of each of the Senior Mezzanine Facility and the Junior Mezzanine Facility (or from their Secured Creditor Representatives).
The Entrenched Rights of the Class A Debt Providers, the Class B Debt Providers, the Finance Lessors, the Senior Mezzanine Debt Providers and the Junior Mezzanine Debt Providers (where applicable) will be exercised through their Secured Creditor Representatives.
121
The Bond Trustee, the Security Trustee, the Hedge Counterparties and the Financial Guarantors have certain other limited Entrenched Rights in relation to any provisions of the Finance Documents that generally affect them to a greater extent than others.
Reserved Matters Reserved Matters are matters which, subject to the Intercreditor Arrangements and the CTA, a Secured Creditor is free to exercise in accordance with its own facility arrangements and so are not exercisable by or by direction of the Majority Creditors.
Those Reserved Matters which each Secured Creditor reserves to itself to decide are each and every right, power, authority and discretion of, or exercisable by, each such Secured Creditor at any time:
(a) to receive any sums owing to it for its own account in respect of premia, fees, costs, charges, liabilities, damages, proceedings, claims and demands in relation to any Authorised Credit Facility to which it is a party (as permitted under the CTA);
(b) to make determinations of and require the making of payments due and payable to it under the provisions of the Authorised Credit Facilities to which it is a party (as permitted under the CTA);
(c) to exercise the rights vested in it or permitted to be exercised by it under and pursuant to the CTA and the STID;
(d) to receive notices, certificates, communications or other documents or information under the Finance Documents or otherwise;
(e) to assign its rights or transfer any of its rights and obligations under any Authorised Credit Facility subject always to the requirement of the assignee or transferee to accede to the CTA and the STID as a Secured Creditor;
(f) in the case of each Finance Lessor, to inspect the relevant Equipment, to make calculations under the financial schedules to the relevant Finance Lease (or the equivalent provisions thereunder relating to the calculation of Rental or termination sums) and to terminate the relevant Finance Lease provided such termination is a Permitted Lease Termination;
(g) in the case of each Hedge Counterparty, to terminate the relevant Hedging Agreement provided such termination is a Permitted Hedge Termination; and
(h) in the case of any Secured Creditor, to accelerate their claims, to the extent necessary to apply proceeds of enforcement of the Share Pledges provided by SWSGH and SWSH pursuant to the terms of the Security Documents.
The Bond Trustee, the Security Trustee, the Mezzanine Facility Lenders, the Hedge Counterparties and the Financial Guarantors each have certain additional Reserved Matters which each has reserved to itself to decide. For the Bond Trustee and each Financial Guarantor, these include rights vested in it pursuant to the terms of the Bond Trust Deed and the Financial Guarantee. For the Security Trustee, these include rights vested in it pursuant to the terms of the STID.
Those Reserved Matters which the Bond Trustee reserves to itself are every right, power, authority and discretion of, or exercisable by, the Bond Trustee (in respect of paragraphs (xiv) to (xix) below, in relation to any Sub-Class of Class A Unwrapped Bonds or Class B Unwrapped Bonds and (where an FG Event of Default has occurred and is continuing in respect of the Financial Guarantor of such Sub-Class of Wrapped Bonds) any such Sub-Class of Class A Wrapped Bonds or Class B Wrapped Bonds), whether expressed as a right, power, authority or discretion of the Bond Trustee or obligation of any other party:
122
(i) to make any determination contemplated or required under the Bond Trust Deed as to the occurrence or otherwise of an FG Event of Default, in relation to its Reserved Matters and in relation to its Entrenched Rights;
(ii) to agree to make any amendment or any waiver or consent which has the effect of resulting in or permitting any amendment to the provisions of any Financial Guarantee;
(iii) to make any claim under, or enforce any provision of, any Financial Guarantee;
(iv) which is provided for the purpose of enabling the Bond Trustee to protect its own position and interests in its personal capacity (including its own personal financial interests) or which the Bond Trustee determines to be necessary or appropriate to exercise for the protection of its own position and interests in its personal capacity;
(v) to determine amounts due in relation to and to claim under indemnities in favour of the Bond Trustee in its own capacity or for and on behalf of Bondholders under the Finance Documents;
(vi) to receive any amounts owing to it for its own account in accordance with the provisions of the Finance Documents;
(vii) to determine the amount of sums due in relation to expenses and stamp duties pursuant to the Finance Documents;
(viii) to make a claim for expenses under the Finance Documents;
(ix) to receive notices, certificates, communications or other documents or information under the Finance Documents or otherwise;
(x) which relieves or exempts the Bond Trustee from liability and exculpates or exonerates it (including, without limitation, any right of the Bond Trustee under any of the Finance Documents to make assumptions as to, or rely on any notice, certificate or other communication confirming, the existence or non-existence of any act, circumstance or event);
(xi) against or in relation to the relevant Bondholders;
(xii) under the Fourth Schedule (Provisions for Meetings of Bondholders) of the Bond Trust Deed;
(xiii) the right to appoint a co-trustee or to retire under, as the case may be, Clause 24 (New Bond Trustee) and Clause 25 (Bond Trustee’s Retirement and Removal) of the Bond Trust Deed;
(xiv) the publication of an Interest Rate or Interest Amount, as the case may be, in accordance with Condition 6(h) (Determination and Publication of Interest Rates, Interest Amounts, Redemption Amounts and Instalment Amounts);
(xv) the determination of amounts in accordance with Condition 6(h) (Determination and Publication of Interest Rates, Interest Amounts, Redemption Amounts and Instalment Amounts);
(xvi) the selection of or made by an Indexation Adviser in accordance with Condition 7(a) (Definitions) and 7(c)(ii) (Changes in Circumstances Affecting the Index – Delay in publication of Index);
(xvii) the consideration and approval in relation to a substitute index figure in accordance with Conditions 7(e)(i) to (iii) inclusive (Cessation of or Fundamental Changes to the Index);
(xviii) the variation, termination and appointment of Agents in accordance with Condition 9(e) (Appointment of the Agents); and
(xix) to consent to any proposed amendment to, as the case may be, the Bond Trust Deed, the relevant Conditions or any Finance Document to which it is a party whether such consent is sought to correct a manifest error or is of a formal, minor or technical nature (and, for the avoidance of doubt, any other
123
matter referred to in Clause 19 (Modification, Consent and Waiver) of the Bond Trust Deed will be subject to the directions of the Majority Creditors).
Those Reserved Matters which each Financial Guarantor reserves to itself are each and every right, power, authority and discretion of, or exercisable by, the relevant Financial Guarantor at any time in respect of the Class A Wrapped Bonds or Class B Wrapped Bonds for which it has issued a Financial Guarantee (except if an FG Event of Default in respect of such Financial Guarantor is continuing) in relation to:
(a) the publication of an Interest Rate or Interest Amount in accordance with Condition 6(h) (Determination and Publication of Interest Rates, Interest Amounts, Redemption Amounts and Instalment Amounts);
(b) the determination of amounts in accordance with Condition 6(h) (Determination and Publication of Interest Rates, Interest Amounts, Redemption Amounts and Instalment Amounts);
(c) the selection of or made by an Indexation Adviser in accordance with Condition 7(a) (Definitions) and 7(c)(ii) (Changes in Circumstances Affecting the Index — Delay in publication of the Index);
(d) the consideration and approval in relation to a substitute index figure in accordance with Condition 7(e)(i) to (iii) inclusive (Cessation of or Fundamental Changes to the Index); and
(e) the variation, termination and appointment of Agents in accordance with Condition 9(e) (Appointment of the Agents).
Each Financial Guarantor of Wrapped Debt (other than Wrapped Bonds) has and will have similar matters reserved to it in respect of the determination of interest, interest amounts and repayment amounts, the selection of an indexation adviser, approval of substitute index figure, variation, termination and appointment of Agents under the Authorised Credit Facility under which such Wrapped Debt is incurred by SWS or the Issuer in addition to any amendment to Part C (Financial Guarantor Reserved Matters) of Schedule 3 to the STID.
Those Reserved Matters which the Security Trustee reserves to itself are each and every right, power, authority and discretion of, or exercisable by, the Security Trustee, whether expressed as a right, power, authority or discretion of the Security Trustee or an obligation of any other party:
(i) pursuant to the STID;
(ii) to receive any sums owing to it for its own account in respect of fees, costs, charges, liabilities, damages, proceedings, claims and demands in performing its powers and exercising its discretions under the STID and any other Finance Document to which the Security Trustee is a party;
(iii) which is provided for the purpose of enabling the Security Trustee to protect its own position and interests in its personal capacity (including its own personal financial interest) or which the Security Trustee determines to be necessary or appropriate to exercise for the protection of its own position and interests in its personal capacity;
(iv) except as otherwise specifically provided in the STID, to apply any of the sums referred to in Clause 15 (Activities of the Security Trustee) of the STID in accordance with such Clause;
(v) to receive notices, certificates, communications or other documents or information, to direct that such notices, certificates, communications or other documents or information must be provided (or must not be provided) to it or (subject to the disclosure of information provisions of the CTA) any other party, or, where applicable, to determine the form and content of any notice, certificate, communication or other document;
(vi) which relieves or exempts the Security Trustee from liability or exculpates or exonerates it (including, without limitation, any right of the Security Trustee under any of the Finance Documents to make
124
assumptions as to, or rely on any notice, certificate or other communication confirming, the existence or non-existence of any act, circumstance or event);
(vii) to determine amounts due in relation to and to claim under indemnities in favour of the Security Trustee under Clause 15.5 (Indemnification of the Security Trustee) or Clause 16 (Remuneration and Indemnification of the Security Trustee) of the STID or pursuant to any other Finance Documents;
(viii) to appoint a co-trustee or to retire under Clause 17 (Appointment of Additional Trustees) and Clause 19.6 (Resignation of the Security Trustee) of the STID; and
(ix) to agree modifications to, or give any consent or grant any waiver under or in respect of, any term of the STID or any other Finance Document to which the Security Trustee is a party or over which it has Security under the Security Documents in accordance with Clause 8.2 (Procedures for Modifications, Consents and Waivers) of the STID.
Substitution of the Issuer The Security Trustee shall implement any STID Proposal proposing the substitution in place of the Issuer, or any substituted Issuer, as the principal debtor under the Finance Documents of any other company incorporated in any other jurisdiction meeting the criteria for such a single purpose company established from time to time by the Rating Agencies. The implementation of any such proposal is an Entrenched Right of the Bond Trustee and each Financial Guarantor.
Intercompany Loan Arrangements
Issuer/SWS Loan Agreements All Financial Indebtedness raised by the Issuer from time to time (whether through the issue of Bonds or raising of debt under Authorised Credit Facilities) is and will be backed by an aggregate matching debt obligation owed by SWS to the Issuer under a loan agreement (each an “Issuer/SWS Loan Agreement”). As such, the Issuer/SWS Loan Agreements are a source of funds capable of servicing any payments due and payable on the Bonds.
In the case of the initial Issuer/SWS Loan Agreement entered into on the Initial Issue Date (the “Initial Issuer/SWS Loan”), the aggregate nominal amount of all Financial Indebtedness raised through the issue of Bonds and the raising of Mezzanine Debt and the Initial Term Facility on the Initial Issue Date was lent by the Issuer to SWS under the Initial Issuer/SWS Loan Agreement on the Initial Issue Date. Each advance under the Initial Issuer/SWS Loan Agreement corresponds to the principal amount of the relevant Sub-Class of Bonds issued on the Initial Issue Date, the principal amount of the Senior Mezzanine Debt and the Junior Mezzanine Debt or, as the case may be, other debt under the Initial Term Facility raised by the Issuer on the Initial Issue Date.
The Issuer advanced the proceeds of the Second Artesian Term Facility to SWS under an Issuer/SWS Loan Agreement dated 5 July 2004 (the “Second Issuer/SWS Loan Agreement”). The advance under the Second Issuer/SWS Loan Agreement is equal to the principal amount of the Second Artesian Term Facility.
The Issuer advanced to SWS the proceeds of each Sub-Class of Series 2 Bonds under an Issuer/SWS Loan Agreement dated 27 May 2005 (the “Third Issuer/SWS Loan Agreement”). Each advance under the Third Issuer/SWS Loan Agreement is equal to the principal amount of the corresponding Sub-Class of Series 2 Bonds.
The Issuer advanced to SWS the proceeds of the Series 3 Bonds under an Issuer/SWS Loan Agreement dated 18 October 2006 (the “Fourth Issuer/SWS Loan Agreement”). The advance under the Fourth Issuer/SWS Loan Agreement is equal to the principal amount of the Series 3 Bonds.
125
The Issuer advanced to SWS the proceeds of the Series 4 Bonds under an Issuer/SWS Loan Agreement dated 17 July 2007 (the “Fifth Issuer/SWS Loan Agreement”). The advance under the Fifth Issuer/SWS Loan Agreement is equal to the principal amount of the Sub-Class of Series 4 Bonds.
The proceeds of all Financial Indebtedness raised by the Issuer through the further issue of Bonds or raising of debt under any Authorised Credit Facility (other than the DSR Liquidity Facilities) will be lent to SWS under further Issuer/SWS Loan Agreements in order that such Financial Indebtedness will be backed by a debt obligation owed to the Issuer under such Issuer/SWS Loan Agreement. Such debt will be subdivided into advances such that each advance corresponds to the principal amounts of the relevant Tranche, Sub-Class or Class of Bonds issued or the principal amount of debt raised under the relevant Authorised Credit Facility or Facilities by the Issuer.
All advances made or to be made by the Issuer under the Issuer/SWS Loan Agreements are or will be in Sterling and in amounts and at rates of interest set out in the relevant Final Terms or Authorised Credit Facility or, if hedged in accordance with the Hedging Policy (see “Hedging Agreements” below), at the hedged rate plus, in each case, a small margin and will have interest payment dates on the same dates as the related Bonds or advance under the relevant Authorised Credit Facility. Interest on each advance made under an Issuer/SWS Loan Agreement will accrue from the date of such advance. In addition, each advance will be repayable on the same date as the related Bonds or advance under the relevant Authorised Credit Facility.
The obligations of SWS under each Issuer/SWS Loan Agreement are or will be secured pursuant to the Security Agreement, and such obligations are or will be guaranteed by SWSH and SWSGH in favour of the Security Trustee, who holds or will hold the benefit of such security on trust for the Secured Creditors (including the Issuer) on the terms of the STID.
The Issuer’s obligations to repay principal and pay interest on the Bonds are intended to be met primarily from the payments of principal and interest received from SWS under each Issuer/SWS Loan Agreement.
SWS agrees to make payments free and clear of any withholding on account of tax unless it is required by law to do so — in such circumstances SWS will gross-up such payments.
In the Common Terms Agreement, SWS makes certain representations and warranties (as more fully set out under “Common Terms Agreement — Representations” below) to each Finance Party (which includes the Issuer as lender under an Authorised Credit Facility).
Each Issuer/SWS Loan Agreement is or will be governed by English law and subject to the exclusive jurisdiction of the English courts (except that the Issuer alone may commence proceedings in any other court with jurisdiction).
Fees Generally The Issuer is responsible for paying the fees and expenses of the Bond Trustee, the Security Trustee, the Paying Agents, the Registrar, the Transfer Agents, the Agent Bank, the Issuer’s legal advisers, accountants and auditors, certain fees due to Financial Guarantors of Wrapped Debt and to liquidity providers.
SWS, by way of facility fees under the Issuer/SWS Loan Agreements, pays to the Issuer amounts equal to the amounts required by the Issuer to pay its ongoing fees and expenses.
Common Terms Agreement
General Each of the Existing Hedge Counterparties, the Security Trustee, the Cash Manager, the Standstill Cash Manager, the Liquidity Facility Providers, the Initial RCF Providers, the Initial Term Facility Provider, each Obligor, the Initial Mezzanine Facility Providers, the Bond Trustee, the Initial Financial Guarantors, the Principal Paying Agent, the Transfer Agent, the Registrar and others entered into a common terms agreement dated 23 July 2003 (as amended from time to time) (the “Common Terms Agreement” or “CTA”). The
126
Common Terms Agreement sets out the representations, covenants (positive, negative and financial), Trigger Events and Events of Default which apply to each Authorised Credit Facility (including, for the avoidance of doubt, the Issuer/SWS Loan Agreements, Hedging Agreements and any other document entered into in connection with an Authorised Credit Facility).
It is a term of the Common Terms Agreement that any representations, covenants (to the extent of being able to declare an Event of Default), Trigger Events and Events of Default contained in any document which is in addition to those in the Common Terms Agreement and any other Common Agreement and any other exception expressly set out in the CTA will be unenforceable (save for limited exceptions which, among other things, include covenants relating to indemnities, covenants to pay, covenants relating to remuneration, costs and expenses, representations and covenants in each Class or Sub-Class of Bonds and certain provisions under the Hedging Agreements and the Finance Leases). The Common Terms Agreement allows SWS (following a Periodic Review or any material change in the regulation of the water industry in the United Kingdom) to amend any financial ratio contained within the covenants, Trigger Events or Events of Default, provided that each Financial Guarantor and the Security Trustee (acting on the instructions of the Majority Creditors) agree and the relevant ratings set out in the definition of Rating Requirement (in relation to the Class A Bonds) and the ratings ascribed to the Class B Bonds at the time of their issue have been affirmed by all Rating Agencies then rating the Class A Bonds and/or Class B Bonds as applicable.
The Common Terms Agreement also sets out the cash management arrangements to apply to the SWS Financing Group (see “Cash Management” below). It is a requirement of the Common Terms Agreement that future providers of Authorised Credit Facilities must also accede to the Common Terms Agreement and the STID.
A summary of the representations, covenants, Trigger Events and Events of Default included in the Common Terms Agreement is set out below.
Representations On the Initial Issue Date each Obligor made a number of representations in respect of itself to each Finance Party. These representations include (subject, in some cases, to agreed exceptions and qualifications as to materiality and reservations of law) representations as to:
(i) its corporate status, power and authority (a) to enter into and perform its obligations under the Transaction Documents and (b) to own, lease and operate its assets and to carry on its business;
(ii) its obligations under the Transaction Documents being its legal, valid and enforceable obligations;
(iii) its entry into and performance under the Transaction Documents not conflicting with any document which is binding upon its assets (or, in the case of SWS, its material assets), its constitutional documents or any material applicable law (save in the case of SWS and the Instrument of Appointment to the extent such conflict has been waived by Ofwat to the reasonable satisfaction of the Security Trustee);
(iv) the preparation of its financial statements in accordance with Applicable Accounting Principles and that such financial statements give a true and fair view of its financial condition;
(v) no event having occurred or circumstance having arisen since the date of the last financial statements which has a Material Adverse Effect (except for any announcement of K from time to time);
(vi) except as disclosed in its financial statements, it not being subject to any contingent liabilities or commitments that would be reasonably likely to have a Material Adverse Effect;
(vii) the validity and admissibility in evidence of the Finance Documents in any proceedings in the jurisdiction of its incorporation;
127
(viii) the Security Documents to which it is party conferring the Security Interests they purport to confer and such Security Interests not being subject to any prior or pari passu Security Interest (other than a Permitted Security Interest);
(ix) the conduct of its business not violating any judgment, law or regulation, which if enforced would have a Material Adverse Effect;
(x) no Default or Potential Trigger Event being outstanding or will result from entry into and performance under the Transaction Documents;
(xi) the obtaining by it prior to the Initial Issue Date of all consents and approvals necessary for the conduct of SWS’ business and the transactions in the Finance Documents which if not obtained or complied with, or which if revoked or terminated, would either (i) have a Material Adverse Effect or (ii) not be in the normal course of business and Good Industry Practice generally;
(xii) its ownership of, or interests in, the assets over which it has created Security Interests under the Security Documents and which are material to the operation of its business;
(xiii) insurances required to be maintained under any Finance Document being in full force and effect where failure to maintain would be reasonably likely to have a Material Adverse Effect;
(xiv) there being no insolvency event in relation to it;
(xv) the ownership structure of the SWS Financing Group;
(xvi) the due payment of all its taxes (save to the extent any tax payment is being disputed in good faith) and the due filing in all material respects of any tax returns and there being no material claims being asserted against it with respect to taxes which are not being disputed in good faith);
(xvii) under the laws of its jurisdiction of incorporation and tax residence in force on the Initial Issue Date, it not (other than as disclosed) being required to make any deduction or withholding from any payment of interest under the Finance Documents in circumstances where, under current United Kingdom law, no United Kingdom withholding tax would be imposed on the payment;
(xviii) the claims of Secured Creditors secured pursuant to a Security Agreement ranking prior to the claims of its other unsecured and unsubordinated creditors;
(xix) no Security Interest having been created, or allowed to exist, other than Permitted Security Interests and no indebtedness incurred other than Permitted Financial Indebtedness and Permitted Volume Trading Arrangements;
(xx) the Bonds constituting (or constituting upon execution, due authentication and delivery) legal and valid obligations binding on the Issuer and enforceable against it in accordance with its terms and constituting evidence of direct, secured and unconditional obligations of the Issuer;
(xxi) no litigation or other proceedings current, or to its knowledge pending or threatened against it or its assets which, if adversely determined, are reasonably likely to have a Material Adverse Effect;
(xxii) limits on its powers not being exceeded as a result of the borrowing, leasing, granting of security or giving or guarantees contemplated by the Finance Documents;
(xxiii) compliance with environmental laws and having obtained all environmental permits necessary for conduct of its business and no environmental claim having been commenced;
(xxiv) no loans made by any Obligor being outstanding to other persons immediately following the issue of Bonds on the Initial Issue Date other than pursuant to Finance Documents, under any Permitted Volume Trading Arrangements and the SWS/SWSG Loan Agreement;
128
(xxv) no Treasury Transactions being outstanding immediately following the issue of Bonds on the Initial Issue Date other than the Initial Hedging Agreements;
(xxvi) all arrangements or contracts with any person being on arm’s length basis and, other than in respect of contracts entered into by SWS and under which payments to be made would fall within paragraph (a) of the exclusions in the definition of Distribution, on terms no less favourable to it than would reasonably be expected to be obtained in a comparable arm’s length transaction with a person not being an Associate, except: (1) contracts entered into by SWS and under which payments to be made would fall within paragraph (c) of the exclusion in the definition of Distribution; (2) as permitted under the Finance Documents; or (3) as a result of a Permitted Emergency Action; and
(xxvii) on the Initial Issue Date, no member of the SWS Financing Group being liable in any manner in respect of any Financial Indebtedness (including by way of primary obligor, guarantor, surety or any other manner) that is not Class A Debt, Class B Debt or Mezzanine Debt, the providers of which have executed the CTA and the STID, the SWS Preference Shares, the initial holders of which will have executed the SWS Preference Share Deed, or Permitted Financial Indebtedness falling within the categories listed in paragraphs (a), (b), (d) or (e) of the definition of Permitted Financial Indebtedness.
Also, on each Issue Date and on each date on which any Financial Guarantee or any other new Authorised Credit Facility is issued or entered into under the Programme, each Obligor will repeat certain of such representations (excluding those representations contained in paragraphs (x), (xxv) and (xxvii) above on each Issue Date and excluding the representation contained in paragraph (xx) on each date on which any Financial Guarantee or any other new Authorised Credit Facility is issued or entered into under the Programme) in relation only to the Bonds or Financial Guarantee then being issued or the new Authorised Credit Facility then being entered into (the “Initial Date Representations”).
On each Payment Date, on each date of a request for a borrowing, on the first date of each borrowing and on each date for payment of a Restricted Payment, each Obligor shall make certain representations (including those contained in paragraphs (i), (ii), (iv), (v), (vi), (xiii), (ix), (xxi), (xxii) and (xxiii) above) (the “Repeated Representations”). Each Obligor shall also make the Repeated Representations on each date on which SWS enters into any new Material Agreement, but only in relation to such new Material Agreement.
Additionally, SWS has made and will make (subject, in some cases, to agreed exceptions and qualifications as to materiality and reservations of law) representations including:
(i) (on the date of each Initial Date Representation and each Repeated Representation) to the best of its knowledge, it has the right to use Intellectual Property Rights necessary to conduct its Business;
(ii) (on the date of each Initial Date Representation) to the best of its knowledge (and save as disclosed to the Security Trustee) all parties to Transaction Documents are in compliance with the Transaction Documents;
(iii) (on the date of each Initial Date Representation) assumptions used in respect of financial ratio calculations and projections having been made in good faith, after due and careful consideration and being consistent with Applicable Accounting Principles and Good Industry Practice;
(iv) (on the date of each Initial Date Representation and each Repeated Representation) it is not aware of any Special Administration Order having been made in respect of it; and
(v) (on the date of each Initial Date Representation) the accuracy (in all material respects) of certain written information provided by SWS and the accuracy of this Prospectus.
Additionally, each of SWSH, SWSGH and the Issuer represents that its activities have been limited to the First Aqua Acquisition, the financing and refinancing thereof following the acquisition by SWI of the Issuer in May 2003 the holding of shares in its subsidiaries, implementing the corporate reorganisation of SWI and
129
its subsidiaries on the Initial Issue Date, the declaration and payments of dividends, and its entry into and performance of documents relating thereto and envisaged by the Transaction Documents.
Covenants The Common Terms Agreement contains certain covenants from each of the Obligors. A summary of the covenants which are (amongst others) included (subject, in some cases, as to agreed exceptions, de minimis amounts and qualifications as to materiality and reservations of law) in the Common Terms Agreement is set out below in “Information — Covenants”, “Covenants — General” and “Financial Covenants”.
Information — Covenants (i) So far as permitted by any applicable law or any binding confidentiality obligation, SWS has undertaken to supply to the Security Trustee, each Rating Agency rating the Bonds at that time and, in certain cases, each Financial Guarantor certain information such as:
(a) a copy of all information, which would reasonably be expected to be material to an Authorised Credit Provider to the SWS Financing Group, which it supplies to the Director General;
(b) as soon as reasonably practicable after becoming aware, details of any proposed material changes to the Instrument of Appointment or any proposed changes to the constitutional documents of any member of the SWS Financing Group;
(c) promptly upon becoming aware, details of any actual or potential enquiry, investigation or proceeding commenced by any government, court, regulatory agency or authority, if such enquiry, investigation or proceeding would be reasonably likely to have a Material Adverse Effect;
(d) as soon as reasonably practicable after receipt, any material notice (including an enforcement notice) from any governmental authority or industry regulator (including Ofwat) received by SWS;
(e) copies of all certificates and responses provided by SWS or any member of the SWS Financing Group to any industry regulator (including Ofwat) which would reasonably be expected to be material and adverse and which relates to the creditworthiness of SWS or SWS’ ability to perform its duties under the Instrument of Appointment;
(f) copies of all reports and information provided by the operator and/or service provider to it under any Material Agreement which would be materially adverse in relation to the creditworthiness of SWS or to SWS’ ability to perform its duties under the Instrument of Appointment;
(g) a semi-annual Investors Report; and
(h) such material information about the business and financial condition of SWS as a Secured Creditor may reasonably and properly request, from time to time, on the request of the Security Trustee (as directed by such Secured Creditor).
(ii) SWS has further agreed to provide information regarding certain changes of control of SWSGH to the Security Trustee, each Financial Guarantor and the Rating Agencies as soon as it becomes aware of any such proposal and to use all reasonable endeavours to procure that the Security Trustee and each Financial Guarantor have been given a reasonable opportunity to express views on the identity and role of any such proposed new Controlling person under any such changes of control.
(iii) SWS has further agreed to provide information in relation to any announcement of K which has or might reasonably have a Material Adverse Effect.
130
(iv) SWS has further agreed to use all reasonable endeavours to supply any information due to, or requested by, the Director General within the time period provided for supply of such information. If no time period is specified, SWS must provide the required information as soon as reasonably practicable. This is subject to action SWS reasonably believes is consistent with prudent management as part of negotiations with the Director General.
(v) Additionally, each Obligor has undertaken to supply to the Security Trustee within a certain timeframe:
(a) its audited financial statements for each of its financial years and, in the case of SWS, its unaudited financial interim statements, for the first half-year of each of its financial years;
(b) copies of all material documents despatched by it to its shareholders (to the extent that such documents would be sent to its shareholders if such Obligor were a listed company) or creditors generally;
(c) as soon as reasonably practicable after becoming aware or available, details of:
(A) any litigation or other proceedings (which alone or in aggregate could reasonably be expected to give rise to a claim against SWS of £5,000,000 (indexed)), which are current, threatened or pending and would be reasonably likely, if adversely determined, to have a Material Adverse Effect;
(B) the periodic information relating to it (such as SWS’ annual charges scheme, a summary of SWS’ strategic business plan at each Periodic Review, SWS’ current Procurement Plan (if any), SWS’ annual drinking water quality report, SWS’ annual environmental report and SWS’ annual conservation and access report);
(C) promptly upon coming aware of them, details concerning any Obligor placed on credit watch with negative implications;
(D) any event which could reasonably be expected to give rise to an insurance claim in excess of £4,000,000 (indexed from the Initial Issue Date);
(E) any Material Entity Event (see “Material Entity Events” below) and/or Emergency which would be reasonably likely to have a Material Adverse Effect;
(F) any non-compliance with any law or regulation which would be reasonably likely to have a Material Adverse Effect;
(G) any other event which would be reasonably likely to have a Material Adverse Effect;
(d) such material information as is reasonably and properly requested by any Secured Creditor; and
(e) notification of any Default or Potential Trigger Event relating to it promptly upon becoming aware of its occurrence (and the steps, if any, being taken to remedy it).
(vi) Additionally, each of SWS and the Issuer has undertaken, among other things:
(a) to supply a compliance certificate signed by two authorised signatories of the Issuer and two directors of SWS; such compliance certificate to be accompanied by a statement as to what the historical and forward-looking financial ratios which are required to be calculated under the Common Terms Agreement are and a copy of the computations made in respect of such historical and forward-looking financial ratios;
(b) to permit the Security Trustee to investigate the calculations contained in any compliance certificate and to call for other substantiating evidence if it certifies to SWS or the Issuer that it has reason to believe that the historical or forward-looking ratios (or confirmation of
131
compliance with the financial ratios) as set out in the statement are incorrect or misleading or in the event that there is a deterioration in the historical ratios; and
(c) to deliver to the Security Trustee promptly after any reasonable request made by the Security Trustee a certificate signed on its behalf by two of its authorised signatories (a) certifying that no Default or Potential Trigger Event is outstanding of which it is aware, having made all reasonable enquiries, or (b) if a Default or Potential Trigger Event is outstanding, specifying the Default or Potential Trigger Event and the steps (if any) taken or proposed to be taken to remedy such event.
(vii) In addition, each Obligor in respect of information delivered electronically:
(a) may deliver any information under the Common Terms Agreement to a Secured Creditor by posting it on an electronic website, provided the Obligor and the Security Trustee have designated a website and the Obligor has notified the Security Trustee and each relevant Secured Creditor of the address and password for such website; and
(b) must notify the Security Trustee if (i) the website cannot be accessed or the website or any information on it is infected for a period of five consecutive days, in which case the Obligor must supply the Security Trustee with all information required under the Common Terms Agreement in paper form with copies as requested by any Finance Party or (ii) if the password is changed.
Covenants — General (i) Each Obligor has undertaken, among other things:
(a) to do all such things as are necessary to maintain its corporate status where failure to do so would be reasonably likely to have a Material Adverse Effect or otherwise adversely affect the Security Interests of the Secured Creditors;
(b) to comply with its cash management obligations (if any) set out in the Common Terms Agreement;
(c) to ensure that the secured claims of Secured Creditors against it under the Finance Documents will rank (subject to certain reservations as to matters of law) prior to the claims of all its other unsecured and unsubordinated creditors save for those whose claims are preferred solely by law;
(d) to operate and maintain, or ensure the operation and maintenance of, its business in a safe, efficient and business-like manner and in accordance with its memorandum and articles of association or other constitutional documents and the Finance Documents and, in the case of SWS, the Instrument of Appointment, the WIA and Good Industry Practice (taking its Business as a whole);
(e) to comply with the terms of the Transaction Documents to which it is a party;
(f) to maintain and take all reasonable steps to enforce its rights and exercise its discretions under the Transaction Documents in accordance with Good Industry Practice;
(g) to ensure that, save as otherwise agreed by the Security Trustee and each Financial Guarantor and save for any Permitted Acquisitions or Permitted Disposals, the corporate ownership structure of the SWS Financing Group (other than the ownership or Control of SWSGH and the ownership of the SWS Preference Shares) remains as at the date of the Common Terms Agreement;
132
(h) so far as permitted by applicable law and regulatory requirements, to execute all such further documents and do all such further things as the Security Trustee (acting reasonably) may consider necessary to give effect to the Finance Documents;
(i) (A) to take all such action as the Security Trustee may reasonably require for the purpose of perfecting, protecting and preserving the rights of the Security Trustee under the Security Documents and the Security Interests under the Security Documents; and (B) to take all actions as the Security Trustee may require, following the making of any acceleration, cancellation or demand under the Issuer/SWS Loan Agreements or the termination of, or prepayment of the rentals relative to, the leasing of the Equipment in each case after the occurrence of a Default for facilitating the exercise of the rights of the Security Trustee under the Security Documents and/or the realisation of any Security Interests under the Security Documents; and (C) to use all reasonable endeavours to receive acknowledgements of assignment from such counterparties as the Security Trustee may nominate;
(j) not to incur any Financial Indebtedness other than Permitted Financial Indebtedness or, in the case of SWS, Permitted Volume Trading Arrangements;
(k) not to enter into any amalgamation, demerger, merger, consolidation or reconstruction other than as agreed by the Security Trustee and each Financial Guarantor (other than, in the case of SWS, a Permitted Disposal or Permitted Acquisition);
(l) not to acquire or invest, other than Permitted Acquisitions and Authorised Investments;
(m) not to be a creditor in respect of any Financial Indebtedness or issue any guarantee or indemnity in respect of the obligations of any other person except for (A) any credit or indemnity provided under any Finance Document; (B) any loan made under the Issuer/SWS Loan Agreements; (C) any loan provided to SWS subordinated to the Authorised Credit Facilities on terms acceptable to the Security Trustee; (D) any guarantee in the Finance Documents; (E) the SWS/SWSG Loan; (F) single loans by SWS to employees of less than £250,000 (indexed from the Initial Issue Date) or loans by SWS to employees in aggregate less than £750,000 (indexed from the Initial Issue Date); (G) in the case of SWS, Permitted Volume Trading Arrangements; (H) any loan made as a Permitted Post Closing Event; (I) other loans by SWS in aggregate of less than £500,000 (indexed from the Initial Issue Date) not falling in (A) to (H) above; provided (other than in the case of (B) and except where a Default is continuing (F)) that no Default or Potential Trigger Event is continuing at the time any such credit or loan or guarantee is proposed to be made or issued;
(n) not to change its memorandum or articles of association or other constitutional documents without the prior written consent of the Security Trustee (provided that SWS may change its memorandum or articles of association or other constitutional documents without the Security Trustee’s consent where such change is not in relation to the SWS Preference Shares and would not be reasonably likely to have a Material Adverse Effect or otherwise prejudice the Security Interests created pursuant to the Security Documents);
(o) not to enter into any Treasury Transaction other than Hedging Agreements;
(p) except for a Permitted Tax Loss Transaction, not to enter, without the consent of the Security Trustee and each Financial Guarantor, into any arrangements with any other company or person (other than a taxation authority in respect of the taxation liabilities of such Obligor or any other Obligor or pursuant to the Finance Documents) relating to Tax;
(q) not to compromise or settle any claim, litigation or arbitration without prior notification to the Security Trustee if any such compromise or settlement would be reasonably likely to have a Material Adverse Effect;
133
(r) (A) to promptly obtain, maintain and comply with the terms of all applicable laws, regulations and orders and obtain and maintain all governmental and regulatory consents, licences, authorisations and approvals (including the Instrument of Appointment) necessary for the conduct of its business, for entry into and performance of the Finance Documents, and for the leasing of the Equipment, as a whole in accordance with Good Industry Practice and (B) to do nothing which would lead to the termination, suspension or revocation of any such consents, licences, authorisations and approvals, in each case where such failure would be reasonably likely to have a Material Adverse Effect;
(s) to maintain separate bank accounts;
(t) to pay all Taxes for which an Obligor is primarily liable and other outgoings prior to penalties being incurred unless payment of those Taxes is being contested in good faith by appropriate means which permit the deferral of payment and/or an adequate reserve has been set aside for payment of those Taxes;
(u) not to create or allow to exist any Security Interest on the Equipment or any of its present or future revenues or assets other than Permitted Security Interests, nor create or enter into any restriction or prohibition on the creation or granting of, any Security Interest on any of its assets except as permitted by the Finance Documents, nor create or permit to exist any further Security Interest over all or any of its present and future revenues, equipment or assets as security for any Permitted Financial Indebtedness other than in favour of the Security Trustee to be held upon the terms of the STID;
(v) not to (A) (i) sell, transfer or otherwise dispose of any of its assets on terms where it is or may be leased to or re-acquired or acquired by any Associate other than (in the case of the Issuer or SWS) pursuant to a Finance Lease; or (ii) sell, transfer or otherwise dispose of any of its receivables (other than Permitted Book Debt Disposals); or (iii) purchase any asset on terms providing for a retention of title by the vendor or on conditional sale terms or on terms having a like substantive effect to any of the foregoing except for assets acquired in the ordinary course of its business carried on in the normal course, in each case (in respect of SWS only), in circumstances where the transaction is entered into primarily as a method of raising Financial Indebtedness or of financing the acquisition of an asset, nor (B) enter into any such transaction in (A) above in circumstances where the transaction is not entered into primarily as a method of raising finance to the extent that the consideration in respect of such sales, leases, transfers or disposals is not received in cash payable in full at the time and exceeds an amount equal to 0.13 per cent. of RCV in aggregate at any time;
(w) not to dispose of all or any part of the Equipment or its undertaking, revenues, business or assets other than a Permitted Disposal or pursuant to the creation of a Permitted Security Interest;
(x) not to change its tax residence from the United Kingdom;
(y) not to (A) redeem, repurchase, defease, retire or repay any of its share capital or resolve to do so; (B) issue any shares which by their terms are redeemable or convertible or exchangeable for Financial Indebtedness; or (C) after the Initial Issue Date, issue any share capital to any person, other than where any such action or transaction: (i) is in respect of the SWS Preference Shares (subject, in certain circumstances, to the Restricted Payment Condition); (ii) is in furtherance of a Restricted Payment and the amount of the Restricted Payment is permitted to be paid pursuant to the Finance Documents; (iii) is expressly permitted under the Finance Documents; or (iv) has received the prior written consent of the Security Trustee and each Financial Guarantor;
134
(z) other than as a result of Permitted Emergency Action (in which case SWS shall use reasonable endeavours to ensure that all contracts entered into will be on an arm’s length basis, although SWS will not be required to obtain alternative competitive quotes) or in respect of contracts entered into by SWS under paragraph (c) of the definition of Distributions, not to enter into any arrangement or contract with any person otherwise than on an arm’s length basis save as has been disclosed or unless expressly permitted under the Finance Documents; and
(aa) other than SWS except with the consent of the Security Trustee and each Financial Guarantor, no Obligor shall participate in a scheme in respect of retirement benefit arrangements with companies other than the other Obligors. SWS may participate in subject to paragraphs (iv) and (v) below, the Permitted Existing Pension Schemes.
(ii) Additionally, each of SWSH and SWSGH has undertaken:
(a) not to: (A) carry on or transact any business or other activity other than (i) ownership of the shares in members of the SWS Financing Group held by it on the Initial Issue Date; (ii) the giving of guarantees in accordance with the Finance Documents; and (iii) performance of obligations required under the Finance Documents; (B) own any asset or incur any liabilities except for the purposes of carrying on that business in accordance with the Finance Documents; (C) suspend, abandon or cease to carry on its business; (D) declare, make or pay Restricted Payments otherwise than as permitted under the Finance Documents; or (E) take any steps to enforce any claims it may have against any other Obligor without the prior written consent of the Security Trustee; and
(b) not to make any Restricted Payments otherwise than out of monies received by it, directly or indirectly, from SWS which have been properly paid by SWS as a Distribution or as set out under the Common Terms Agreement.
(iii) Save as otherwise approved by the Security Trustee, SWS has further undertaken to maintain on its board of directors at least three non-executive directors who are not employees or directors of any Associate (subject to temporary vacancies arising out of exceptional circumstances).
(iv) Additionally, SWS has undertaken among other things:
(a) to ensure that the nature of its business is limited to the Business;
(b) to conduct its Appointed Business in the name of SWS only and to ensure that separation from the Group or Associates is maintained at all times by holding SWS out as a separate entity, correcting any misunderstanding as to identity and using stationery, invoices and cheques separate from any other person or entity;
(c) not to permit, agree to or recommend any suspension or the abandonment of all or a material part of the operation of its Appointed Business unless such suspension or abandonment is in accordance with its Instrument of Appointment;
(d) if it exceeds the Permitted Non-Appointed Business Limits, to dispose of or reduce all or part of its Permitted Non-Appointed Business within six months so that the Permitted Non-Appointed Business Limits are complied with on the next Calculation Date;
(e) to comply in all material respects with the Instrument of Appointment save to the extent Ofwat has waived or approved such non-compliance to the reasonable satisfaction of the Security Trustee;
(f) not to agree to any amendment or variation of the Instrument of Appointment which would reasonably be expected to have a Material Adverse Effect;
135
(g) to comply with applicable relevant Environmental Laws and Environmental Approvals applicable to it, where failure to do so would be reasonably likely to have a Material Adverse Effect;
(h) as soon as reasonably practicable upon becoming aware of the same, notify the Security Trustee of: (A) any environmental claim that is current or, to the best of its knowledge and belief, is threatened; or (B) any facts or circumstances which will or are reasonably likely to result in an environmental claim being commenced or threatened against it, which, in either case if substantiated, is reasonably likely either to have a Material Adverse Effect or result in any material liability for a Finance Party;
(i) to effect and maintain those insurances in connection with its Business as are required under the Common Terms Agreement;
(j) to take all reasonable action to safeguard and maintain such present and future rights in accordance with Intellectual Property Rights necessary for its Business including observing all covenants and stipulations relating thereto and obtaining all necessary registrations;
(k) (A) other than in respect of contracts entered into by SWS and under which payments to be made would fall within paragraphs (a) or (c) of the exclusions in the definition of Distribution, to comply with the Outsourcing Policy, which became effective on and from the Initial Issue Date and applies to each Outsourcing Agreement and Capex Contract entered into by SWS (other than any Excluded Agreements) on and from the Initial Issue Date; (B) subject to (A), to procure that any Outsourcing Agreement or Capex Contract entered into on and from the Initial Issue Date complies with the Public Procurement Rules (if such Outsourcing Agreement or Capex Contract would be an agreement to which the Public Procurement Rules would apply) and the Outsourcing Policy; (C) where an Emergency is continuing, to use its best endeavours to rectify such Emergency as soon as is reasonably practicable (for the avoidance of doubt, any Permitted Emergency Action will not constitute a breach of the Outsourcing Policy); (D) each time an Excluded Agreement expires in accordance with its terms or is terminated early, any agreement entered into by SWS in place of such Excluded Agreement shall comply with the Outsourcing Policy (to the extent required by the terms of the Outsourcing Policy); (E) not to amend, modify or alter any material provision or agree to renew or extend (or agree to exercise any option to renew or extend) any Excluded Agreement without the consent of the Security Trustee and each Financial Guarantor; and (F) to at all times use Good Industry Practice in exercising its rights and performing its obligations under any Excluded Agreement. In March 2005 SWS obtained a waiver from the Majority Creditors in relation to certain aspects of the Single Entity Contract described in Chapter 4 “Description of the SWS Financing Group – Capital Investment Programme” that do not comply with the Outsourcing Policy – see “Events of Default” below;
(l) to ensure it has adequate financial and management resources to enable it to discharge its core obligations under the Instrument of Appointment and under the Transaction Documents and, in respect of performance obligations which are either passed on to a Contractor or outsourced, it has retained sufficient control to discharge its obligations under the Instrument of Appointment and under the Transaction Documents;
(m) following receipt of notice of termination of the Instrument of Appointment, SWS must use its reasonable endeavours to ensure that subject to its obligations under the WIA: (A) a Transfer Scheme is agreed between SWS, the transferee and the Director General by a date no less than two years prior to the expiration of such notice; and (B) any such Transfer Scheme will not be prejudicial to the interests of the Secured Creditors;
136
(n) to use all reasonable endeavours to ensure that the Security Trustee is joined in the consultation process with the Director General if SWS becomes subject to any Transfer Scheme;
(o) subject to its obligations under the WIA, not to agree to any Transfer Scheme without the consent of the Security Trustee and each Financial Guarantor;
(p) other than in respect of the SWS Preference Shares, to ensure that there are no agreements in force or corporate resolutions passed which call for the present or further issue or allotment of, or grant to any person other than SWSH, the right (whether conditional or otherwise) to call for the issue or allotment of any share (or equivalent) loan note or loan capital of SWS (including an option or right of pre-emption or conversion);
(q) to make an SWS/SWSG Debt Service Distribution quarterly each year and then only provided that certain conditions are met, including each of the following:
(i) no Event of Default is subsisting or will result from the payment;
(ii) no event of default has occurred and is continuing under the SWS/SWSG Loan Agreement and SWSG is not in default of its obligations under the SW Tax Deed of Covenant;
(iii) all dividends declared by SWS, SWSH and SWSGH are validly declared;
(iv) all payments in respect of a Permitted Tax Loss Transaction comply fully with the SW Tax Deed of Covenant and the CTA; and
(v) such SWS/SWSG Debt Service Distribution is made against irrevocable payment instructions directing the Account Bank to remit the proceeds thereof on receipt by SWSG to the relevant account of SWS for same day value;
(r) to comply with the obligations to provide information under any Surveillance Letter or any Authorised Credit Facility;
(s) to apply to the Director General for an IDOK when permitted under the Instrument of Appointment (or use any other means available to apply for an IDOK), in all circumstances which are appropriate in accordance with Good Industry Practice provided that any such application is consistent with prudent management;
(t) to levy charges to customers which, together with other available amounts, are as far as possible sufficient, within the constraints of the current price control framework, to enable SWS to meet its operational, investment and financial obligations on a timely basis under the Instrument of Appointment and its obligations in respect of Financial Indebtedness;
(u) not to propose any resolution for, or agree to any material amendments to, variation, modification, waiver, suspension, revocation, termination of any Material Agreement save in accordance with the Outsourcing Policy without the prior written consent of the Security Trustee; and
(v) to (i) procure that the nature of the business of its Pension Companies is limited to the business and functions of a trustee of an occupational pension scheme (as defined in section 1 of the Pension Schemes Act 1993) in respect of SWS Pension Schemes only and (ii) procure that the Pension Companies do not incur any Financial Indebtedness or permit security to be taken over their assets or shares other than where such Security is taken in accordance with the Security Agreement.
(v) Additionally, SWS and the Issuer have undertaken among other things:
137
(a) to maintain a rating of the Class A Debt and Class B Debt and a shadow rating of Class A Wrapped Debt with any two of the Rating Agencies;
(b) only to:
(A) pay Customer Rebates at a time when no Event of Default is subsisting;
(B) other than in the case of Permitted Post Closing Events, any SWS/SWSG Debt Service Distribution, any Subordinated Debt Replacement Event and any SWS Preference Share Conversion Event, pay any Distribution or make any payment under the Subordinated Debt or SWS Preference Shares if:
(i) in the case of Distributions or dividends under the SWS Preference Shares, the payment is made after a duly constituted board meeting has been held approving the declaration of such Distribution or dividend;
(ii) the amount of the Distribution, payment under the Subordinated Debt and/or payment under the SWS Preference Shares that may be paid is limited to an amount equal to the Proposed Payment Amount (as defined below);
(iii) on the date of such payment:
(a) no drawings are outstanding under the Liquidity Facilities, other than Standby Drawings;
(b) save in the case of the first scheduled payment under the Subordinated Debt and the SWS Preference Shares, the Senior RAR, as certified by the Issuer and SWS in the Compliance Certificate most recently delivered to the Security Trustee and each Rating Agency, is less than or equal to 0.850:1 for each Test Period (after deducting an amount equal to the aggregate of any proposed Customer Rebates, proposed Distribution, proposed payment on the Subordinated Debt and proposed payment on the SWS Preference Shares (the “Proposed Payment Amount”) from available cash); and
(c) no Default subsists or might reasonably be expected to result from the payment and the Repeated Representations are, and will following such payment remain, correct, provided that if such Default arises as a result of a notice to terminate the Instrument of Appointment having been served then such Default shall be deemed to be cured if an independent financial adviser shall have certified to the Security Trustee that a Transfer Scheme as defined in Schedule 2 of the WIA or other satisfactory security has been established that will not be materially prejudicial to the interests of the Class A Debt Providers or the Class B Debt Providers (as the case may be); and
(iv) in the case of a payment under the SWS Preference Shares or any Subordinated Debt into which the SWS Preference Shares have converted, at the time of such payment there is no amount which has fallen due under the Subordinated Debt which has not been paid or would, but for any deferral of unpaid amounts, have fallen due,
and SWS shall be treated as having made to each Secured Creditor in respect of Class A Debt and Class B Debt a representation on the date of any Restricted Payment that each of the conditions necessary to be satisfied in relation to such Restricted Payment has been satisfied.
138
In addition to the restrictions on payment of Restricted Payments described above, a Restricted Payment will not be permitted if certain changes of control of SWSGH result in a downgrade of the shadow rating of the Class A Wrapped Debt to or below BBB+ (S&P), Baa1 (Moody’s) and BBB+ (Fitch) and such ratings have not been restored;
(c) to agree to co-operate with the Rating Agencies in connection with any reasonable request for information in respect of the maintenance of a shadow rating or rating and with any review of its business which may be undertaken by one or more of the Rating Agencies after the date of the Common Terms Agreement;
(d) to ensure that there are installed and maintained accounting, management information, financial modelling and cost control systems which are of such a standard which can produce the information required within the time set out in the Finance Documents and procure that there are maintained books of account and other records adequate to reflect fairly and accurately its financial condition, the results of its operations and to provide the reports required to be delivered pursuant to the Finance Documents;
(e) to authorise the Auditors to communicate directly with the Security Trustee at such time as such parties may reasonably require (and whilst any Default is outstanding at any time) regarding its accounts and operations and furnish to the Security Trustee a copy of such authorisation, subject to the Auditors’ agreement to communicate at such time and upon agreed conditions;
(f) to inform the Security Trustee of any change to the Auditors, as soon as reasonably practicable;
(g) to only replace the Auditors without the prior written approval of the Security Trustee if the replacement Auditors are a firm of independent public accountants of international standing;
(h) not to change its financial year end without the prior written consent of the Security Trustee, such consent not to be refused if Ofwat requires the relevant financial year to be changed, in which case SWS will change the financial covenant calculations in such manner as the Security Trustee deems necessary to enable such calculations to continue to be calculated from the relevant financial statements of SWS; and
(i) to ensure that it will not enter into any Authorised Credit Facility (other than in respect of any Subordinated Debt) unless following such entry into of such Authorised Credit Facility: (a) its aggregate nominal outstanding Financial Indebtedness which has an expected maturity falling within any period of 24 consecutive months shall not exceed 20 per cent. of SWS’ RCV for the time being, and (b) the aggregate nominal outstanding Financial Indebtedness which has an expected maturity falling within the period from one Periodic Review to the next Periodic Review shall not exceed 40 per cent. of SWS’ RCV for the time being (adjusted and increased proportionately to the extent that the period from one Periodic Review to the next Periodic Review is greater than five years).
(vi) Additionally, the Issuer has undertaken, among other things:
(a) not to (A) carry on any business other than the raising of funds to provide debt financing to SWS for the purposes of its Business in accordance with the Finance Documents or any Hedging Agreement in accordance with the Hedging Policy; (B) own any assets or incur any liabilities except as required or permitted pursuant to the Finance Documents; (C) suspend, abandon or cease to carry on its business; or (D) take any steps to enforce any claims it may have against any other Obligor without the prior written consent of the Security Trustee;
(b) to enter into the hedging arrangements contemplated in the Hedging Policy, in accordance with the terms of the Hedging Policy;
139
(c) prior to any refinancing of any Class B Debt with any Class A Debt, to obtain confirmation from all Rating Agencies then rating the Bonds that the Rating Requirement is met and will not cease to be met as a result of such refinancing;
(d) to use all reasonable endeavours to procure the admission of all listed Bonds for trading on the Market or the PSM, or such other stock exchange approved by the Dealers and the Bond Trustee, and to maintain such admission until none of the relevant listed Bonds is outstanding;
(e) upon receiving a written request from the Bond Trustee, to deliver to the Bond Trustee a certificate of the Issuer setting out inter alia details of the aggregate principal amount outstanding under the outstanding Bonds purchased by the Issuer and as are held by any person for the benefit of any member of the SWS Financing Group, any Financial Guarantor or, so far as the Issuer is aware, any of their respective Affiliates, holding companies and subsidiaries;
(f) to send or procure to be sent (not less than three days prior to the date of publication) to the Bond Trustee for the Bond Trustee’s approval, one copy of each notice to be given to the Bondholders in accordance with the Conditions and not to publish such notice without such approval and, upon publication, send to the Bond Trustee two copies of such notice (such approval, unless so expressed, not to constitute approval for the purpose of section 21 of the FSMA of such notice as an investment advertisement (as therein defined));
(g) to procure that the Principal Paying Agent notifies the Bond Trustee forthwith if it does not, on or before the due date for payment in respect of the Bonds, receive unconditionally the full amount in the correct currency of the monies payable on such due date;
(h) to forthwith give notice to the Bondholders of payments made after their due date to the Principal Paying Agent or the Bond Trustee;
(i) not less than the number of days specified in the relevant Conditions prior to the redemption or repayment date in respect of any Bond, to give to the Bond Trustee notice in writing of the amount of such redemption or repayment pursuant to the Conditions;
(j) prior to giving notice to the Bondholders that it intends to redeem the Bonds pursuant to Condition 8(c) (Redemption for Index Event, Taxation or Other Reasons) or 8(b) (Optional Redemption), to provide such information to the Bond Trustee and the Financial Guarantors as the Bond Trustee and the Financial Guarantors require in order to satisfy themselves of the matters referred to in those Conditions;
(k) to promptly give notice to the Bond Trustee and to the Security Trustee (A) if it is required by law to effect a deduction or withholding of Tax in respect of any payment due in respect of any Bonds listed on a recognised stock exchange (within the meaning of section 841 of the Income and Corporation Taxes Act 1988); or (B) if a Hedge Counterparty is required to make a deduction or withholding of Tax in respect of any payment due under the relevant Hedging Agreement; or (C) if it would not be entitled to relief for Tax purposes, in any jurisdiction in which it carries on business or is resident for tax purposes, for any material amount which it is obliged to pay under the Finance Documents and which is or has been assumed in the SWS Business Financial Model to be available for relief for Tax purposes, and in each case, take such action as may be required by the Bond Trustee and Security Trustee in respect thereof;
(l) while any of the Bonds remain outstanding, to give notice, or procure that notice is given, to each of the Rating Agencies of (A) any proposed amendment to the Finance Documents other than amendments that the Bond Trustee considers to be of a formal, minor or technical nature or made to correct a manifest error or necessary or desirable for clarification; (B) any request for consent from the Security Trustee and each Financial Guarantor under any Finance Document (other than the STID) in relation to any matter or act which would be automatically treated as
140
permitted by such Finance Document upon the giving of consent by the Security Trustee and each Financial Guarantor; (C) the Bonds of any Sub-Class being repaid in full; (D) the termination of the appointment of the Cash Manager; (E) the appointment of a replacement Bond Trustee or Security Trustee or the appointment of any new or replacement Agents; (F) any Default; (G) the taking of Enforcement Action; (H) the occurrence of any SWS Change of Control or certain changes of control of SWSGH; or (I) the acquisition of any Permitted Subsidiary pursuant to a Permitted Acquisition, in each case, promptly after the Issuer or SWS becoming aware of the same;
(m) to observe and comply with its obligations, and use all reasonable endeavours to procure that the Agents observe and comply with all their obligations under the Agency Agreement and, if any Registered Bonds are outstanding, to procure that the Registrar maintains the Register and to notify the Bond Trustee immediately if it becomes aware of any material breach or failure by an Agent in relation to the Bonds;
(n) to give not less than 14 days’ prior notice to the Bondholders of any future appointment or any resignation or removal of any Agent or of any change by any Agent of its specified office;
(o) if, before an Interest Payment Date for any Bond, it becomes subject generally to the taxing jurisdiction of any territory or any political sub-division thereof or any authority therein or thereof having power to tax other than or in addition to the United Kingdom, to notify (immediately upon becoming aware thereof) the Bond Trustee of such event and (unless the Bond Trustee otherwise agrees) to enter into a deed supplemental to the Bond Trust Deed, so that the relevant Condition shall make reference to that other or additional territory; and
(p) to notify the Bond Trustee of any amendment to the Dealership Agreement.
Financial Covenants (i) SWS has undertaken, among other things:
(a) to deliver, with each Compliance Certificate and each Investors Report, a statement confirming that it has calculated each of the following ratios as at the Calculation Date immediately prior to the date of delivery of that Compliance Certificate, specifying the results of such calculations and providing a copy of the computations made in respect of the calculation of such ratios:
(A) the Class A ICR for each Test Period;
(B) the Senior Adjusted ICR for each Test Period;
(C) the Class A Adjusted ICR for each Test Period;
(D) the Senior Average Adjusted ICR;
(E) the Class A Average Adjusted ICR;
(F) the Senior RAR as at such Calculation Date and, in the case of forward-looking ratios, the 31 March falling in each Test Period;
(G) the Class A RAR as at such Calculation Date and, in the case of forward-looking ratios, the 31 March falling in each Test Period; and
(H) the ratio of Net Cash Flow minus Capital Maintenance Expenditure to Class A Debt Interest for the 12 month period ending on such Calculation Date,
and to calculate (x) the historical ratios using the audited financial statements (or unaudited financial statements if audited financial statements are not available on such date) delivered with such Compliance Certificate and (y) the forward-looking ratios using the SWS Business
141
Financial Model which shall be prepared on a consistent basis and using assumptions from the most recently available relevant information and the most recently delivered financial statements; and
(b) at each Periodic Review and on making each IDOK application, to apply to the Director General for a price determination which in the reasonable opinion of the SWS directors would allow, at a minimum, a credit rating in the A Category to be achieved and maintained for the Class A Unwrapped Debt and a shadow rating in the A Category to be achieved and maintained for the Class A Wrapped Debt, in each case from at least two of the Rating Agencies.
(ii) The Issuer has further undertaken to maintain:
(a) a DSR Liquidity Facility available for drawing which (when aggregated with all amounts (including the value of any Authorised Investments) standing to the credit of the Debt Service Reserve Account) is not less than the amount of interest (including Lease Reserve Amounts and Adjusted Lease Reserve Amounts) payable on its Class A Debt and Class B Debt for the next succeeding 12 month period (after taking into account the impact on interest rates of such Class A Debt and Class B Debt of any Hedging Agreements then in place); and
(b) an O&M Reserve and/or O&M Reserve Facility available for drawing which together (including the value of any Authorised Investments funded from the balance on any O&M Reserve Account) amount to not less than 10 per cent. of Projected Operating Expenditure and Capital Maintenance Expenditure for the next succeeding 12 month period as forecast in the SWS Business Financial Model.
Trigger Events The Common Terms Agreement also sets out certain Trigger Events. The specific Trigger Events and the consequences which flow from the occurrence of those events are set out below.
The occurrence of any of the following events will be a Trigger Event:
(i) Financial Ratios
On any date when any of the following ratios are calculated in accordance with the Common Terms Agreement to breach the relevant level specified below (each a “Trigger Event Ratio Level”) as at the most recently occurring Calculation Date:
(a) the Senior RAR as at such Calculation Date or, in the case of forward-looking ratios, as at 31 March falling in any Test Period is or is estimated to be more than 0.900:1;
(b) the Class A RAR as at such Calculation Date or, in the case of forward-looking ratios, as at 31 March falling in any Test Period is or is estimated to be more than 0.750:1;
(c) the Senior Adjusted ICR for any Test Period is or is estimated to be less than 1.10:1;
(d) the Class A Adjusted ICR for any Test Period is or is estimated to be less than 1.30:1;
(e) the Senior Average Adjusted ICR is or is estimated to be less than 1.20:1; or
(f) the Class A Average Adjusted ICR is or is estimated to be less than 1.40:1.
(ii) Credit Rating Downgrade
(a) The long-term shadow credit rating of any Class A Wrapped Debt given by any two of the Rating Agencies falls to BBB (S&P), Baa2 (Moody’s) or BBB (Fitch) or below;
(b) the long-term credit rating of any Class A Unwrapped Debt by any two of the Rating Agencies falls to BBB (S&P), Baa2 (Moody’s) or BBB (Fitch) or below;
142
(c) the long-term shadow credit rating of the Class B Wrapped Debt by any two of the Rating Agencies falls below Investment Grade; or
(d) the long-term credit rating of the Class B Unwrapped Debt by any two of the Rating Agencies falls below Investment Grade.
Each credit rating referred to above is the “Trigger Credit Rating” for the relevant Class of Bonds.
(iii) Debt Service Payment Account Shortfall
The failure by SWS to pay the Monthly Payment Amount within five Business Days following the date on which such payment was scheduled to be made.
(iv) Material Deviation in Projections
On any Calculation Date, the estimated actual Capital Expenditure over any five year period between Periodic Reviews exceeds the Capital Expenditure for that period assumed by the Director General in the last Periodic Review (adjusted to take account of any subsequent IDOK and Out-turn Inflation, including variances in real construction prices from assumed construction prices, and deducting capital expenditure incurred or to be incurred in respect of items for which SWS is entitled to make an application for an IDOK) in respect of SWS by 10 per cent. or more.
(v) Liquidity for Capital Expenditure and Working Capital
If, as at any Calculation Date, the aggregate of (i) SWS’ operating cash flows including monies standing to the credit of the Operating Accounts available or forecast to be available to meet Capital Expenditure and working capital requirements for the next Test Period; (ii) Authorised Credit Facilities (excluding Liquidity Facilities) available to be drawn in the next 12 month period; and (iii) all amounts standing to the credit of the Capex Reserve Account is less than the aggregate of SWS’ (a) forecast Capital Expenditure projected for the next 12 month period; (b) forecast working capital requirements projected for the next 12 month period; (c) the maximum total amount of interest in respect of Class A Debt and Class B Debt which is or is projected to fall due and payable during the next succeeding 12 month period; (d) all amounts which are or are projected to fall due and payable during the next succeeding 12 month period in respect of Financial Indebtedness which falls within paragraph (e) of the definition of Permitted Financial Indebtedness; and (e) the amount the Issuer estimates, in its reasonable opinion, is equal to the net amount payable by the Issuer to a Hedge Counterparty following the exercise of an option to terminate a Treasury Transaction as permitted by the Hedging Policy.
(vi) Drawdown on DSR Liquidity Facilities and O&M Reserve Facility
If, at any time, the aggregate of all amounts available for drawing under the DSR Liquidity Facilities and all amounts standing to the credit of the Debt Service Reserve Account is less than the Required Balance (although it will not be a Trigger Event if it is triggered as a direct result of a banking error and remedied by such amount being repaid within three Business Days without such repayment being funded by a further drawing under a DSR Liquidity Facility).
The Issuer draws down under an O&M Reserve Facility or either the Issuer or SWS withdraws funds from either O&M Reserve Account, in either case to pay SWS’ operating or maintenance expenditure (excluding any drawing or repayment of any Standby Drawing in relation to the Issuer’s O&M Reserve Facility).
(vii) Enforcement Order
An Enforcement Order (as defined under the WIA) is issued under Part II, Chapter 11 of the WIA against SWS which would have a Material Adverse Effect if not complied with.
143
(viii) Circumstances leading to a Special Administration Order
Any indication arising from notices and/or correspondence issued by, or during correspondence with, the Director General or any other circumstance of which SWS is aware that would reasonably be expected to lead to an application by the Director General or the Secretary of State for a Special Administration Order to be made in respect of SWS.
(ix) Termination of Instrument of Appointment
The giving of a notice to terminate the Instrument of Appointment under the WIA.
(x) Event of Default
An Event of Default is continuing.
(xi) Material Entity Event.
A Material Entity Event occurs in relation to a Material Agreement or a Contractor and/or SWS under a Material Agreement and which continues unremedied for 60 days (other than (i) a Material Entity Event in relation to a Contractor’s failure to pay (see paragraph (a) of “Material Entity Events” below) which continues unremedied for 45 days or (ii) a Material Entity Event in relation to a misrepresentation or breach of obligation which is capable of remedy (see paragraphs (b) and (c) of “Material Entity Events” below) which continues unremedied for 30 days) from the date from which SWS could be reasonably expected to become aware of such Material Entity Event unless the relevant Contractor has been replaced in accordance with the Outsourcing Policy or SWS has terminated the appointment of the relevant Contractor and assumed the obligations of the Contractor under the relevant Material Agreement.
(xii) Referral
A referral is made under sub-paragraph 14.3 of Condition B in Schedule 2 (Shipwreck Clause) to the Instrument of Appointment (or any successor or equivalent paragraph) as a result of any adverse event.
(xiii) Audit Qualification
The Auditors qualify their report on any audited Statutory Accounts of any member of the SWS Financing Group in a manner which causes the Security Trustee to believe that the financial ratios calculated in accordance with the Common Terms Agreement may not reflect the true position of SWS.
(xiv) Adverse Governmental Legislation
The commencement of the final reading of draft legislation in the House of Lords or the House of Commons (whichever occurs later) of legislation relating to or impacting upon Relevant Undertakers (as that term is defined in the WIA) if such legislation could (if enacted) reasonably be expected to lead to a breach of the financial ratios referred to in “Financial Ratios” above or cause a material deviation as set out in “Material Deviations in Projections” above, in each case taking into account any actions available to SWS to mitigate the same.
(xv) Modification or Replacement of Instrument of Appointment
If within three months of an announcement setting out clear proposals by Ofwat for the modifications or replacement of the Instrument of Appointment which, if implemented, could reasonably be expected to have a Material Adverse Effect and a timetable for the implementation of such proposals, SWS has not obtained confirmation from Ofwat that the proposed modification or replacement is not expected to be implemented or is expected to be implemented in a form which is not reasonably expected to have a Material Adverse Effect.
144
(xvi) Conduct of Business
The Permitted Non-Appointed Business Limits are breached.
(xvii) Breach of Outsourcing Policy
SWS fails duly to perform or comply with its material obligations as required under the Outsourcing Policy (other than as a result of Permitted Emergency Action) and fails to remedy such breach within 90 days of SWS becoming aware of such breach. (In March 2005 SWS obtained a waiver from the Majority Creditors in relation to certain aspects of the Single Entity Contract described in Chapter 4 “Description of the SWS Financing Group – Capital Investment Programme” that do not comply with the Outsourcing Policy.)
(xviii) Adverse Final Determination of K
A final determination of K by Ofwat which is reasonably likely to have a Material Adverse Effect.
(xix) Shareholder Tax Deed of Covenant
A TDC Breach arises under the Shareholder Tax Deed of Covenant solely as a result of the acquisition by a person of control of SWSGH by virtue of acquiring a beneficial interest in any shares in RBSG.
Trigger Event Consequences Following the occurrence of a Trigger Event and at any time until such Trigger Event has been waived by the Security Trustee, remedied in accordance with Trigger Event Remedies (see “Trigger Events Remedies” below) or otherwise remedied to the satisfaction of the Security Trustee, the following consequences (“Trigger Event Consequences”) will apply:
(i) No Restricted Payments
No Obligor may make Restricted Payments and, in respect of Customer Rebates, if these have not yet been implemented, SWS must stop their implementation and must not declare any Customer Rebates.
(ii) Further Information and Remedial Plan
(a) SWS must provide such information as to the relevant Trigger Event (including its causes and effects) as may be requested by the Security Trustee.
(b) SWS must discuss with the Security Trustee its plans for appropriate remedial action and the timetable for implementation of such action. SWS and the Security Trustee may agree a Remedial Plan (with the agreement of the Security Trustee not to be unreasonably withheld or delayed) and any Remedial Plan must then be implemented by SWS.
(iii) Independent Review
(a) The Security Trustee may (acting on the instructions of the Majority Creditors) commission an Independent Review to be undertaken on the timetable stipulated by the Security Trustee. The Independent Review will be conducted by technical advisers to the Security Trustee appointed from time to time or such other person as the Security Trustee may decide.
(b) The Independent Review will examine the causes of the relevant Trigger Event and recommend appropriate corrective measures.
(c) Each of the Issuer and SWS must co-operate with the person appointed to prepare the Independent Review including providing access to its books and records and personnel and facilities as may be required for those purposes.
(iv) Consultation with Ofwat
145
The Security Trustee shall be entitled to discuss the relevant Trigger Event and any Remedial Plan with Ofwat at any time.
(v) Appointment of additional non-executive directors
If the relevant Trigger Event has not otherwise been remedied or waived within six months from the date of its occurrence or such longer period as the Security Trustee, each Financial Guarantor and SWS may agree in a Remedial Plan, the Security Trustee will be entitled to procure the appointment of further non-executive directors to the board of SWS (in addition to those already on the board of SWS) in such numbers as would allow it, following such appointments, to have appointed a maximum of 20 per cent. of the board by number.
(vi) Payments under Outsourcing Agreements and Capex Contracts with Associates
All payments made by SWS under Outsourcing Agreements and/or Capex Contracts with Associates (excluding, for the avoidance of doubt, contracts which fall within paragraphs (a) and (c) of the definition of Distribution) which do not comply with the Outsourcing Policy in all material respects, shall be made as Distributions where such non-compliance has remained unremedied for a period in excess of 365 days from the date on which SWS became aware of such non-compliance.
In respect of any of the Trigger Event Consequences described above which requires the Security Trustee to exercise its discretion, it must do so upon instructions of the Majority Creditors and any reference to reasonableness and reasonable time will be interpreted accordingly. The Security Trustee is entitled to assume that no Trigger Event has occurred unless informed otherwise.
Trigger Event Remedies At any time when the Issuer or SWS (as the case may be) believes that a Trigger Event has been remedied by virtue of any of the following, it shall serve notice on the Security Trustee to that effect, and the Security Trustee must respond within 10 days (or such longer period as it may reasonably stipulate within five Business Days of receipt of such notice from the Issuer or SWS (as the case may be)) confirming that the relevant Trigger Event has, in its reasonable opinion, been remedied or setting out its reasons for believing that such Trigger Event has not been remedied (in which case, such event shall continue to be a Trigger Event until such time as the Security Trustee is reasonably satisfied that the Trigger Event has been remedied).
The following shall constitute remedies to the Trigger Events (each, a “Trigger Event Remedy”):
(i) Financial Ratios
The breach of a Trigger Event Ratio Level shall be remedied if such ratio or ratios come within the relevant level or levels specified below in relation to the most recently occurring Calculation Date:
(a) the Senior RAR as at such Calculation Date and, in the case of any forward-looking ratios, as at the 31 March falling in each Test Period relating to such Calculation Date is or is estimated to be less than 0.900:1;
(b) the Class A RAR as at such Calculation Date and, in the case of any forward-looking ratios, as at the 31 March falling in each Test Period relating to such Calculation Date is or is estimated to be less than 0.750:1;
(c) the Senior Adjusted ICR for each Test Period relating to such Calculation Date is or is estimated to be greater than 1.10:1;
(d) the Class A Adjusted ICR for each Test Period relating to such Calculation Date is or is estimated to be greater than 1.30:1;
(e) the Senior Average Adjusted ICR is or is estimated to be greater than 1.20:1; or
146
(f) the Class A Average Adjusted ICR is or is estimated to be greater than 1.40:1.
(ii) Credit Rating Downgrade
The occurrence of a Trigger Event in relation to a credit rating downgrade (see paragraph (ii) of “Trigger Events” above) shall be remedied if the credit rating of the relevant Class of debt given by any two of the Rating Agencies is above the Trigger Credit Rating.
(iii) Debt Service Required Payment Shortfall
The occurrence of a Trigger Event in relation to the non-payment of the Monthly Payment Amount into the Debt Service Payment Account (see paragraph (iii) of “Trigger Events” above) will be remedied if payment of the required amount is paid into the Debt Service Payment Account.
(iv) Material Deviation in Projections
The occurrence of a Trigger Event in relation to material deviations in projections (see paragraph (iv) of “Trigger Events” above) will be remedied if the deviations referred to in that paragraph, on any subsequent date, are less than 10 per cent. of the figure assumed by the Director General in the last Periodic Review (adjusted to take account of any subsequent IDOK and Out-turn Inflation) or, if a different figure is subsequently agreed by Ofwat and SWS, the deviations are less than 10 per cent. of the subsequently agreed figure, as the case may be.
(v) Liquidity for Capital Expenditure and Working Capital
The occurrence of a Trigger Event in relation to liquidity for capital expenditure and working capital (see paragraph (v) of “Trigger Events” above) will be remedied if on any subsequent date the amounts referred to in sub-paragraphs (i) to (iii) of that paragraph are in aggregate equal to or greater than the aggregate of the amounts referred to in sub-paragraphs (a) to (e) of that paragraph.
(vi) Drawdown on DSR Liquidity Facilities and O&M Reserve Facility
(a) The occurrence of a Trigger Event in relation to drawdowns under the DSR Liquidity Facility (see paragraph (vi) of “Trigger Events” above) will be remedied if the amount available for drawing under the DSR Liquidity Facilities when aggregated with all amounts standing to the credit of the Debt Service Reserve Account is restored to at least the Required Balance.
(b) The occurrence of a Trigger Event in relation to a drawing under the O&M Reserve Liquidity Facility (see paragraph (vi) of “Trigger Events” above) will be remedied if the amount available for drawing under the O&M Reserve Facility, when aggregated with the O&M Reserve, is at least equal to the O&M Reserve Required Amount.
(vii) Enforcement Order
The occurrence of a Trigger Event in relation to an Enforcement Order (as set out in paragraph (vii) of “Trigger Events” above) will be remedied if SWS has complied with the terms of the relevant Enforcement Order to the reasonable satisfaction of the Security Trustee or if the Enforcement Order has been effectively withdrawn or if, in the opinion of the Security Trustee (acting reasonably), the relevant fine will not have a Material Adverse Effect or that the Instrument of Appointment will not be terminated.
(viii) Circumstances leading to a Special Administration Order
The occurrence of a Trigger Event in relation to circumstances leading to a Special Administration Order (as set out in paragraph (viii) of “Trigger Events” above) will be remedied if (a) a Special Administration Order is not made within six months of the relevant Trigger Event occurring or (b) the Security Trustee is reasonably satisfied that a Special Administration Order will not be made in respect of SWS.
147
(ix) Termination of Instrument of Appointment
The occurrence of a Trigger Event in relation to termination of the Instrument of Appointment (as set out in paragraph (ix) of “Trigger Events” above) will be remedied by agreement by SWS to the extent that a Transfer Scheme reasonably satisfactory to the Security Trustee is implemented prior to the termination of the Instrument of Appointment.
(x) Event of Default
The occurrence of a Trigger Event in relation to an Event of Default (as set out in paragraph (x) of “Trigger Events” above) will be remedied if the Event of Default is waived or revoked in accordance with the STID or is remedied to the reasonable satisfaction of the Security Trustee.
(xi) Material Entity Event
The occurrence of a Material Entity Event in relation to a Trigger Event (as set out in paragraph (xi) of “Trigger Events” above) will be remedied:
(a) if it is remedied to the satisfaction of the Security Trustee and each Financial Guarantor;
(b) if the Contractor has been replaced in accordance with the Outsourcing Policy or if SWS has terminated the appointment of the relevant Contractor and assumed the obligations of that Contractor as prescribed under the relevant Material Agreement; or
(c) upon the acceptance by the Security Trustee and each Financial Guarantor of a Remedial Plan for as long as it is being complied with in all respects.
(xii) Referral
The occurrence of a Trigger Event in relation to a referral under the Instrument of Appointment (as set out in paragraph (xii) of “Trigger Events” above) will be remedied if:
(a) in the absence of any determination or forecast of the determination of the Director General the financial ratios set out above come within the relevant level or levels specified in paragraph (i) of “Trigger Event Remedies” in relation to the most recently occurring Calculation Date; or
(b) the Director General has made a determination that restores the financial ratios specified in paragraph (i) of “Trigger Events” above to at least the Trigger Event Ratio Levels.
(xiii) Audit Qualification
The occurrence of a Trigger Event in relation to an audit qualification (as set out in paragraph (xiii) of “Trigger Events” above) will be remedied if the Security Trustee is satisfied that such qualification does not affect the veracity of the financial ratios calculated in accordance with the Common Terms Agreement or if SWS produces a further set of Statutory Accounts upon which the auditors’ report is not qualified.
(xiv) Adverse Governmental Legislation
The occurrence of the Trigger Event in relation to adverse Governmental legislation (as set out in paragraph (xiv) of “Trigger Events” above) will be remedied if the draft bill fails to become an act of parliament or becomes an act in a form which is reasonably likely not to cause a breach of the financial ratios set out in paragraph (i) of “Trigger Events” above or such financial ratios are otherwise reinstated to the Trigger Event Ratio Levels or the Director General has confirmed that the Capital Expenditure which would otherwise have led to a material deviation as referred to in paragraph (iv) of “Trigger Events” above is allowable under adjustments to the RCV and, when taking such adjustment into account, such financial ratios would meet the Trigger Event Ratio Levels.
(xv) Modification or Replacement of Instrument of Appointment
148
The occurrence of a Trigger Event in relation to the modification or replacement of the Instrument of Appointment (as set out in paragraph (xv) of “Trigger Events” above) will be remedied if an independent expert on behalf of the Security Trustee determines that the modifications to the Instrument of Appointment or, as the case may be, the replacement licence or licences to be granted to SWS will or do contain equivalent terms which permit SWS to carry on its water and sewerage business substantially as carried on as of the Initial Issue Date taking into account any changes in the regulatory environment since the Initial Issue Date and in the opinion of the Security Trustee such terms will not be reasonably likely to:
(a) have a Material Adverse Effect; or
(b) result in a breach of the financial ratios as referred to in paragraph (i) of “Trigger Events” above.
(xvi) Conduct of Business
Within six months of the date of the occurrence of the Trigger Event in relation to the conduct of business (as set out in paragraph (xvi) of “Trigger Events” above), SWS disposes of all or part of the Permitted Non-Appointed Business so that the Permitted Non-Appointed Business Limits will be complied with during the current Test Period excluding (for the purpose of calculating such ratio) the aggregate Non-Appointed Expenses of the former Permitted Non-Appointed Business which has been disposed of by SWS during such Test Period.
(xvii) Breach of Outsourcing Policy
The occurrence of the Trigger Event in relation to a breach of the Outsourcing Policy (as set out in paragraph (xvii) of “Trigger Events” above) will be remedied and the Trigger Event Consequence set out in paragraph (vi) of “Trigger Event Consequences” above will be disapplied if SWS takes such action as is necessary so that it is in compliance with the Outsourcing Policy.
(xviii) Adverse Final Determination of K
The occurrence of the Trigger Event in relation to an adverse final determination of K (as set out in paragraph (xviii) of “Trigger Events” above) will be remedied if the financial ratios set out above ‘come within the relevant level or levels specified in paragraph (i) of “Trigger Event Remedies” in relation to the most recently occurring Calculation Date.
(xix) Shareholder Tax Deed of Covenant
The occurrence of a Trigger Event in relation to the Shareholder Tax Deed of Covenant as set out in paragraph (xix) under “Trigger Events” above will be remedied if either:
(a) the circumstances which gave rise to the TDC Breach referred to in that paragraph cease to exist; or
(b) the Security Trustee confirms pursuant to the Shareholder Tax Deed of Covenant that the TDC Breach which caused the Trigger Event is no longer occurring.
In respect of any of the Trigger Event Remedies which require the Security Trustee to exercise its discretion, it must do so upon instructions of the relevant Majority Creditors, and any reference to reasonableness and reasonable time will be interpreted accordingly.
Events of Default The Common Terms Agreement contains a number of events of default (the “Events of Default”) which will be Events of Default under each Finance Document (other than, in the respect of the Hedge Counterparties, the Hedging Agreements). Subject, in some cases, to agreed exceptions, materiality qualifications, reservations of law and grace periods. Events of Default include:
149
(a) non-payment of amounts payable under the Finance Documents within three Business Days of the due date;
(b) non-compliance with certain other obligations under the Finance Documents (other than the Tax Deeds of Covenant) or the occurrence of a TDC Breach which is continuing;
(c) material misrepresentation;
(d) any Financial Indebtedness not being paid when due (after the expiry of any applicable grace period) or any Financial Indebtedness being declared due and payable prior to its specified maturity as a result of an event of default;
(e) an Insolvency Event or Insolvency Proceedings occur(s) in relation to the Obligors other than SWS or, in relation to SWS, an insolvency event or insolvency proceedings as set out further in the CTA occur(s) in relation to SWS;
(f) SWS transferring the Instrument of Appointment without the Security Trustee’s consent or SWS receiving notice that the Instrument of Appointment will be revoked or terminated and a scheme of transfer not being approved by the Secretary of State or the Director General on or before the date falling two years prior to the expiration of such notice;
(g) the Instrument of Appointment being terminated and not replaced immediately by a further licence on equivalent terms taking into account any changes in the regulatory environment since the Initial Issue Date;
(h) insufficient liquidity (from operating cash flows, the Authorised Credit Facilities and the Capex Reserve Account) to meet SWS’ forecast Capital Maintenance Expenditure and working capital requirements projected for the next six month period;
(i) attachment, sequestration, distress or execution involving sums in excess of £500,000 (indexed) and if not discharged within 30 days;
(j) any Obligor repudiating a Finance Document or it becoming unlawful or ineffective for any Obligor to perform its material obligations under any Finance Document;
(k) an SWS Change of Control occurs;
(l) any of the Security ceasing to be in full force and effect;
(m) certain governmental action (including nationalisation) which would be reasonably likely to have a Material Adverse Effect;
(n) a member of the SWS Financing Group failing to comply with a judgment involving sums in excess of £500,000 (indexed) in aggregate at any time except where such judgement is being appealed in good faith to a higher court;
(o) other than in the case of a Permitted Lease Termination, an Obligor not having legal power to perform its obligations under the Finance Documents or any obligation of any Obligor under a relevant Finance Document (other than stamp duty indemnities) ceasing to be legal, binding and enforceable and the absence of compliance has a Material Adverse Effect;
(p) SWS failing to comply with its obligations under the Outsourcing Policy (and such failure has a Material Adverse Effect);
(q) an Obligor other than SWS ceasing or threatening to cease to carry on its business (or any substantial part of its business) it carries on as at the date of the CTA or as contemplated by the Finance Documents or SWS ceasing or threatening to cease to carry on the Appointed Business (or any
150
substantial part of the Appointed Business) it carries on at the date of the CTA or which is contemplated by the Finance Documents other than as permitted by the Finance Documents;
(r) litigation being started against an Obligor or its assets or revenues which would be reasonably likely to be adversely determined and, if so adversely determined, would have a Material Adverse Effect;
(s) the shadow rating of the Class A Wrapped Bonds or the rating of the Class A Unwrapped Bonds in each case ascribed by two Rating Agencies being less than the minimum required for Investment Grade;
(t) the Class A ICR being less than 1.60:1, the Senior RAR being more than 0.950:1 and/or the ratio of Net Cash Flow minus Capital Maintenance Expenditure to Class A Debt Interest for the immediately preceding 12 month period is less than 1.00:1;
(u) an Obligor (other than SWS) amending its memorandum or articles of association or SWS amending its memorandum or articles, if such amendment relates to the terms of the SWS Preference Shares or is in a manner which is reasonably likely to have a Material Adverse Effect or diminish the value of any Security Interest granted in favour of the Security Trustee, unless the Security Trustee has previously given its prior written consent to such amendment;
(v) a Material Entity Event (as described in “Material Entity Events” below) occurring which has a Material Adverse Effect.
In March 2005 SWS obtained a waiver from the Majority Creditors in relation to certain aspects of the Single Entity Contract described in Chapter 4 “Description of the SWS Financing Group – Capital Investment Programme” that do not comply with the Outsourcing Policy.
In December 2005, SWS obtained a waiver from the Majority Creditors in relation to the opening of two new bank accounts required in order to implement a counter payment network service administered by PayPoint Network Limited and PayPoint Collections Limited, which provides SWS with the facility to collect cash payments for water bills through PayPoint terminals located in the convenience retail sector.
SWS has obtained waivers from the Majority Creditors in respect of the requirement to produce consolidated accounts for SWS for the years ending 31 March 2005, 31 March 2006, 31 March 2007 and 31 March 2008.
In respect of each Event of Default requiring any action or discretion on the part of the relevant creditor, the Security Trustee will (save in respect of certain Entrenched Rights and Reserved Matters (see “Entrenched Rights and Reserved Matters” above)) act in accordance with the instructions of the Majority Creditors in accordance with the STID (see “Security Trust and Intercreditor Deed” above).
Immediately upon the notification to the Security Trustee of an occurrence of an Event of Default, a Standstill Period will commence in accordance with the STID (see “Security Trust and Intercreditor Deed — Standstill” above).
Material Entity Events The Common Terms Agreement provides (subject, in some cases to certain exceptions, reservations of law and grace periods) that each of the following will constitute a Material Entity Event in respect of any Contractor under a Material Agreement or, as the case may be, SWS, to the extent that such event would be reasonably likely to have a Material Adverse Effect:
(a) any amount due from the Contractor or SWS is not paid unless payment is made within 15 days of an Obligor becoming aware of such failure or save if such payment is being disputed in good faith;
(b) any representation or statement made or deemed to be made by a Contractor or SWS in any Material Agreement is or proves to have been incorrect or misleading in any respect when made or deemed to
151
be made and such failure, if capable of remedy, is not remedied by the Contractor or SWS within 30 days of it becoming aware that such representation was incorrect or misleading in any respect;
(c) the Contractor or SWS fails duly to perform or comply with any other obligation expressed to be assumed by it in any Material Agreement and such failure, if capable of remedy, is not remedied by such Contractor or SWS, as the case may be, within 30 days of becoming aware of such breach;
(d) the Contractor:
(A) ceases or suspends generally payment of its debts or publicly announces an intention to do so or is unable to pay its debts as they fall due or is deemed to be insolvent; or
(B) commences negotiations with or makes a proposal to any one or more of its creditors concerning its solvency, with a view to the readjustment or rescheduling of any indebtedness;
(e) an Insolvency Event or equivalent event occurs in relation to a Contractor to a Material Agreement;
(f) the Contractor fails to comply with or pay any sum due from it under any judgment or any order made or given by any court of competent jurisdiction at any time except where such judgment is being appealed in good faith to a higher court;
(g) any Material Agreement to which the Contractor and SWS is a party or any obligation purported to be contained therein or the security or credit enhancement intended to be effected in relation to such Material Agreement is repudiated by the Contractor or SWS or it does or causes to be done any act or thing evidencing an intention to repudiate, abandon, cancel, suspend or terminate any Material Agreement to which SWS or the Contractor is a party or the security or credit enhancement related there to or any such obligation or any such security or subordination effected under any of the Material Agreements to which it is a party or any Material Agreement is not or ceases to be in full force and effect or the legal validity or applicability thereof to any sums due or to become due thereunder is disaffirmed by the Contractor or SWS or on behalf of the Contractor or SWS; and
(h) the Contractor, SWS or any provider of security or credit enhancement therefor does not have the legal power to perform any of its obligations under the Material Agreements or, as the case may be, such security or credit enhancement or to own any assets or to carry on any part of its business or at any time it is or becomes unlawful for the Contractor, SWS or any provider of security or credit enhancement therefor to perform or comply with any of its obligations under any Material Agreement or any of the obligations of the Contractor or any provider of security or credit enhancement thereunder are not or cease to be legal, valid, binding and enforceable.
Conditions Precedent The conditions precedent to, among other things, the release of Financial Guarantees and to the issue of Bonds are set out in a conditions precedent agreement dated 23 July 2003 (the “CP Agreement”) between, among others, the Bond Trustee, the Security Trustee and the Obligors.
Cash Management
Accounts In accordance with the Common Terms Agreement, SWS has opened and maintains the following Accounts with the Account Bank:
(a) each Operating Account;
(b) an O&M Reserve Account; and
(c) the Capex Reserve Account.
152
The Issuer has also opened or (in the case of the O&M Reserve Account) shall open and maintain the following Accounts with the Account Bank:
(a) the Debt Service Payment Account;
(b) the Debt Service Reserve Account; and
(c) in the event the Issuer becomes a borrower under an O&M Reserve Facility, an O&M Reserve Account.
SWSGH and SWSH have each opened and maintain one chequing account only with the Account Bank.
Each of the above accounts together with any other bank account of any Obligor are collectively referred to as the “Accounts”. Each of the Accounts is held with the Account Bank pursuant to the Account Bank Agreement. Each Obligor agreed in the Common Terms Agreement to comply with the Account Bank Agreement and the provisions of the Common Terms Agreement applying to its Accounts.
Operating Accounts Under the Common Terms Agreement, SWS must ensure that all of its revenues (other than any interest or Income which is credited to the Account from which the Authorised Investment was made) will be paid into an operating account.
For those revenues of SWS which are received into existing collection accounts of SWS with a bank other than the Account Bank, SWS must ensure the balance on such collection accounts is transferred into an Operating Account at least once a week and, following a downgrade of the short term unsecured unsubordinated debt rating of such bank (excluding for this purpose Alliance & Leicester Commercial Bank plc (formerly Girobank and now part of the Santander Group)) below the Minimum Short-term Rating, on close of business of each Business Day.
The Operating Accounts are the principal current accounts of SWS through which all operating and Capital Expenditure or any Taxes incurred by SWS and (subject to the terms of the Finance Documents) payments in respect of the Financial Indebtedness of the SWS Financing Group which are not permitted to be satisfied out of monies credited to the Debt Service Payment Account are cleared. SWS may make transfers at any time from one Operating Account to another, in its sole discretion.
All operating expenditure of SWS is funded (a) through payments made directly into the Operating Accounts and (b) through drawings made by the Issuer or SWS under any Authorised Credit Facility or other Permitted Financial Indebtedness and, in the case of drawings made by the Issuer (except under any DSR Liquidity Facility), on lent to SWS under an Issuer/SWS Loan Agreement, as and when required and permitted by the Finance Documents. Capital Expenditure is funded out of monies standing to the credit of the Operating Accounts, out of cash transfers made from the Capex Reserve Account to the Operating Accounts and/or (in relation to Capital Maintenance Expenditure), to the extent that the sums standing to the credit of the Operating Accounts and the Capex Reserve Account are insufficient, SWS’ O&M Reserve Account.
All Distributions, payments under the SWS Preference Shares (or, following an SWS Preference Share Conversion Event, the relevant Subordinated Debt into which the SWS Preference Shares are converted) and Permitted Post-Closing Events have been or will be funded (directly or indirectly) out of monies standing to the credit of the Operating Accounts subject always to the satisfaction of all of the conditions set out in the Common Terms Agreement for the making of such payments.
Annually on 31 March of each year (or, if such day is not a Business Day, the immediately preceding Business Day) SWS calculates the Annual Finance Charge for the period of 12 months commencing on the immediately following 1 April, and details of such calculation are included in the next following Investors Report.
153
Under the Common Terms Agreement, SWS on the opening of business on the first Business Day of each month until the Discharge Date transfers to the Issuer from the Operating Accounts an amount (the “Monthly Payment Amount”) equal to 1/12th of SWS’ Annual Finance Charge for the relevant 12 month period to the Debt Service Payment Account provided that the aggregate of any interest accruing on and credited to the Debt Service Payment Account is treated as a prepayment of future Monthly Payment Amounts payable during the relevant 12 month period. Accordingly, the Monthly Payment Amounts due for the remaining months of such 12 month period shall be reduced pro rata to reflect such prepayment.
SWS recalculates the Annual Finance Charge and the Monthly Payment Amount, as applicable if, during the course of any relevant 12 month period, there occurs any increase (whether as a result of any increase in the rate of applicable interest, any drawing under any Authorised Credit Facility, any deferral of interest, any upwards adjustment of rentals under any Finance Lease, or otherwise) or decrease (whether as a result of any reduction in the rate of applicable interest, downwards adjustment of rentals under any Finance Lease or any prepayment or repayment of the debt under which the relevant liabilities arise or accrue or otherwise) in the Annual Finance Charge and adjusts the Monthly Payment Amount for the remaining months in the relevant 12 month period, and details are included in the next following Investors Report.
Capex Reserve Account As at 31 December 2008 approximately £42.8 million was standing to the credit of the Capex Reserve Account.
SWS may not withdraw any monies from the Capex Reserve Account unless such withdrawal is for the purpose of funding a transfer to the Operating Account on account of SWS’ capital expenditure requirements or as contemplated below in relation to the application of insurance proceeds.
SWS must ensure that the proceeds of any advance to it under any Authorised Credit Facility for the purpose of funding its capital expenditure is paid directly into the Capex Reserve Account or an Operating Account.
SWS must also ensure that all proceeds of any property damage insurance claim (other than in respect of delay in start up, business interruption or anticipated loss in revenue or third party claims) are paid directly into the Capex Reserve Account.
SWS may withdraw the proceeds of property damage insurance claims from the Capex Reserve Account for application in meeting payments which are due and payable in respect of the restoration, reinstatement or replacement of the asset lost or damaged or, where any Permitted Lease Termination has arisen as a consequence of the loss of such asset, in payment of any Class A Debt falling due on the date of that Permitted Lease Termination arising as a consequence of the loss of such asset.
If SWS has paid sums to reinstate, restore or replace assets or effects lost or damaged or to meet claims by third parties out of moneys withdrawn from the Operating Accounts, then SWS may pay the relevant insurance amounts received directly into an Operating Account. If the reinstatement, restoration or replacement cost of any damaged property is less than the property damage insurance proceeds received by it in relation to such property, SWS may pay the difference into an Operating Account.
SWS’ O&M Reserve Account As at 31 December 2008 approximately £43.7 million was standing to the credit of the O&M Reserve Account.
SWS may not withdraw any monies from its O&M Reserve Account unless (i) such withdrawal is for the purpose of funding a transfer to an Operating Account on account of operating and capital expenditure requirements that cannot be met from existing balances in the Operating Accounts and additionally, in the case of any capital expenditure requirement, the Capex Reserve Account (ii) such withdrawal is for the purpose of transferring into an Operating Account any interest income earned from time to time on the O&M Reserve (including Income from any related Authorised Investments) or (iii) prior to making a withdrawal,
154
SWS delivers a certificate to the Security Trustee and the Account Bank certifying that, following such proposed withdrawal, the aggregate of the O&M Reserve and all amounts then available for drawing under any O&M Reserve Facility are at least equal to the O&M Reserve Required Amount on the date of such withdrawal. As at the date of this Prospectus, SWS has not withdrawn any monies from its O&M Reserve Account.
SWS must ensure that the proceeds of any drawing by the Issuer under any O&M Reserve Facility Agreement (other than a Standby Drawing) are lent by the Issuer to SWS under an Issuer/SWS Loan Agreement and are paid directly into SWS’ O&M Reserve Account or an Operating Account.
Debt Service Payment Account As at 31 December 2008 approximately £72.5 million was standing to the credit of the Debt Service Payment Account.
SWS must ensure that each transfer of or in respect of the Monthly Payment Amount from the Operating Account, is made to the Issuer directly into the Debt Service Payment Account.
The Common Terms Agreement provides that, on each Payment Date, monies credited to the Debt Service Payment Account must be applied by the Issuer in the following order for the purpose of enabling the following payments (“Permitted Payments”) to be made in the following order of priority (the “Payment Priorities”) without double counting:
(i) first (to the extent there are insufficient monies standing to the credit of all other Accounts and/or available for drawing under any Liquidity Facility), in or towards satisfaction of all of the SWS Financing Group’s operating costs (except to the extent falling due under the Finance Documents) and maintenance costs;
(ii) second, pro rata, according to the respective amounts thereof in or towards satisfaction of the remuneration, costs and expenses of the Security Trustee and the Bond Trustee;
(iii) third, pro rata, according to the respective amounts thereof in or towards satisfaction of, on a pro rata basis: (a) the remuneration, costs and expenses of each Agent, the Account Bank under the Account Bank Agreement, each DSR Liquidity Facility Provider under the relevant DSR Liquidity Facility Agreement, each O&M Reserve Facility Provider under the relevant O&M Reserve Facility Agreement, each facility agent under the relevant Authorised Credit Facility and the Standstill Cash Manager; and (b) the remuneration, costs and expenses of and fees of each Financial Guarantor pursuant to the relevant G&R Deed;
(iv) fourth, pro rata according to the respective amounts thereof, in or towards satisfaction of: (a) all amounts of fees, interest and principal (other than any Subordinated Liquidity Facility Amounts) due or overdue to each DSR Liquidity Facility Provider under the relevant DSR Liquidity Facility Agreement; (b) all amounts of fees, interest and principal (other than Subordinated Liquidity Facility Amounts) due or overdue to each O&M Reserve Facility Provider under the relevant O&M Reserve Facility Agreement; and (c) all amounts of interest and principal due or overdue to each Authorised Credit Provider under the relevant Authorised Credit Facility to the extent that the Financial Indebtedness was incurred to fund a New Money Advance;
(v) fifth, pro rata according to the respective amounts thereof, in or towards satisfaction of all scheduled amounts payable to each Hedge Counterparty under any Interest Rate Hedging Agreement;
(vi) sixth, pro rata according to the respective amounts thereof, in or towards satisfaction of: (a) all amounts of interest (including the Lease Reserve Amounts and Adjusted Lease Reserve Amounts), recurring fees and commitment commissions due or overdue in respect of the Class A Debt (other than any Subordinated Coupon Amounts and Subordinated Authorised Loan Amounts); (b) any unscheduled amounts (including termination amounts) due and payable to each Hedge Counterparty
155
under any Interest Rate Hedging Agreement (except to the extent required to be paid at paragraph (xvi) below); (c) all scheduled amounts (other than principal exchange amounts) payable to each Hedge Counterparty under any Currency Hedging Agreement in respect of Class A Debt and (subject to paragraph (xvi) below and following termination of a Standstill Period other than due to remedy or waiver by the Majority Creditors of, or the revocation of, the Event of Default giving rise to the Standstill Period) all amounts payable to each Hedge Counterparty under any Currency Hedging Agreement in respect of Class A Debt; (d) all amounts of underwriting commissions due or overdue in respect of the Class A Debt; and (e) all reimbursement sums (if any) owed to each Financial Guarantor under the relevant G&R Deed in respect of payments of interest on any Class A Wrapped Debt guaranteed by such Financial Guarantor;
(vii) seventh, pro rata according to the respective amounts thereof, in or towards satisfaction of: (a) all amounts of principal due or overdue in respect of the Class A Debt (including, in respect of Finance Leases, those amounts payable in respect thereof which do not fall within paragraph (vi) above and do not fall due as a result of the operation of any indemnity or fee reimbursement provision of a Finance Lease); (b) all principal exchange amounts due and payable to each Hedge Counterparty under any Currency Hedging Agreement in respect of Class A Debt; (c) any termination amounts or other unscheduled sums due and payable to each Hedge Counterparty under any Currency Hedging Agreement in respect of Class A Debt (except to the extent required to be paid at paragraph (xvi) below); and (d) all reimbursement sums (if any) owed to each Financial Guarantor under the relevant G&R Deed in respect of payments of principal on any Class A Wrapped Debt guaranteed by such Financial Guarantor;
(viii) eighth, in or towards satisfaction of any Make-Whole Amount due and payable on the Class A Debt;
(ix) ninth, pro rata according to the respective amounts thereof, in or towards satisfaction of ail Subordinated Coupon Amounts due or overdue in respect of any Class A Bonds;
(x) tenth, in payment to the Debt Service Reserve Account until the sum of the balance thereon and the aggregate available commitments under the DSR Liquidity Facility Agreements is equal to the Class A Required Balance;
(xi) eleventh, in payment to the Issuer’s O&M Reserve Account until the sum of the O&M Reserve and the aggregate of amounts available to be drawn under O&M Reserve Facilities is equal to the O&M Reserve Required Amount;
(xii) twelfth, pro rata according to the respective amounts thereof, in or towards satisfaction of all amounts of: (a) interest and commitment commissions due or overdue in respect of the Class B Debt (other than any Subordinated Coupon Amounts due or overdue in respect of any Class B Bonds and Subordinated Authorised Loan Amounts); (b) all amounts of underwriting commissions due or overdue in respect of the Class B Debt; (c) except to the extent required to be paid at paragraph (xvi) below, all scheduled amounts (other than principal exchange amounts) payable to each Hedge Counterparty under any Currency Hedging Agreement in respect of Class B Debt and (following termination of a Standstill Period other than due to remedy or waiver by the Majority Creditors of, or revocation of, the Event of Default giving rise to the Standstill Period) all amounts payable to each Hedge Counterparty under any Currency Hedging Agreement in respect of Class B Debt; and (d) all reimbursement sums (if any) owed to each Financial Guarantor under the relevant G&R Deed in respect of payments of interest on any Class B Wrapped Debt guaranteed by such Financial Guarantor;
(xiii) thirteenth, pro rata according to the respective amounts thereof, in or towards satisfaction of: (a) all amounts of principal due or overdue in respect of the Class B Debt; (b) all principal exchange amounts due and payable to each Hedge Counterparty under any Currency Hedging Agreement in respect of Class B Debt; (c) except to the extent required to be paid at paragraph (xvi) below, any termination amounts or other unscheduled sums due and payable to each Hedge Counterparty under any Currency
156
Hedging Agreement in respect of Class B Debt; and (d) all reimbursement sums (if any) owed to each Financial Guarantor under the relevant G&R Deed in respect of payments of principal on any Class B Wrapped Debt guaranteed by such Financial Guarantor;
(xiv) fourteenth, pro rata according to the respective amounts thereof, in or towards satisfaction of any Make-Whole Amounts due and payable on the Class B Debt;
(xv) fifteenth, in payment to the Debt Service Reserve Account until the sum of the balance thereon and the aggregate available commitments under the DSR Liquidity Facilities is equal to the sum of the Class A Required Balance and the Class B Required Balance;
(xvi) sixteenth, pro rata according to the respective amounts thereof, in or towards satisfaction of: (a) any other amounts (not included in paragraphs (vi) and (vii) above) due and/or overdue to the Finance Lessors; and (b) any termination payment due or overdue to a Hedge Counterparty under any Hedging Agreement which arises as a result of a default by such Hedge Counterparty or as a result of a downgrade in the credit rating of such Hedge Counterparty (other than any amount attributable to the return of collateral or any premium or other upfront payment paid to the Issuer to enter into a transaction to replace a Hedging Agreement (in whole or in part)) shall be applied first in payment of amounts due to the Hedge Counterparty in respect of that Hedging Agreement;
(xvii) seventeenth, pro rata according to the respective amounts thereof, in or towards satisfaction of: (a) all Subordinated Liquidity Facility Amounts due or overdue to each Liquidity Facility Provider under the Liquidity Facility Agreements; (b) all Subordinated Authorised Loan Amounts due or overdue to each Authorised Credit Provider under the relevant Authorised Credit Facility in respect of Class A Debt; (c) any other indemnified amounts due or overdue to each Financial Guarantor under the relevant G&R Deed in respect of any Class A Wrapped Debt guaranteed by such Financial Guarantor; and (d) any amounts payable in respect of Class A Debt not referred to in other sub-paragraphs of the Payment Priorities;
(xviii) eighteenth, pro rata according to the respective amounts thereof, in or towards satisfaction of: (a) all Subordinated Authorised Loan Amounts due or overdue to each Authorised Credit Provider under the relevant Authorised Credit Facility in respect of Class B Debt; (b) any other indemnified amounts due or overdue to each Financial Guarantor under the relevant G&R Deed in respect of any Class B Wrapped Debt guaranteed by such Financial Guarantor; and (c) any amounts payable in respect of Class B Debt not referred to in any other sub-paragraphs of the Payment Priorities;
(xix) nineteenth, pro rata according to the respective amounts thereof, in or towards satisfaction of all Subordinated Coupon Amounts due or overdue in respect of any Class B Bonds;
(xx) twentieth, subject always to the satisfaction of the Restricted Payment Condition, pro rata according to the respective amounts thereof, in or towards satisfaction of all amounts of interest due or overdue in respect of the Senior Mezzanine Debt;
(xxi) twenty-first, subject always to the satisfaction of the Restricted Payment Condition, pro rata according to the respective amounts thereof, in or towards satisfaction of all amounts of principal due or overdue in respect of the Senior Mezzanine Debt;
(xxii) twenty-second, subject always to the satisfaction of the Restricted Payment Condition, pro rata according to the respective amounts thereof, in or towards satisfaction of any other sums due or overdue in respect of the Senior Mezzanine Debt;
(xxiii) twenty-third, subject always to the satisfaction of the Restricted Payment Condition, pro rata according to the respective amounts thereof, in or towards satisfaction of all amounts of interest due or overdue in respect of the Junior Mezzanine Debt;
157
(xxiv) twenty-fourth, subject always to the satisfaction of the Restricted Payment Condition, pro rata according to the respective amounts thereof, in or towards satisfaction of all amounts of principal due or overdue in respect of the Junior Mezzanine Debt;
(xxv) twenty-fifth, subject always to the satisfaction of the Restricted Payment Condition, pro rata according to the respective amounts thereof, in or towards satisfaction of any other sums due or overdue in respect of the Junior Mezzanine Debt;
(xxvi) twenty-sixth, subject always to the satisfaction of the Restricted Payment Condition, in or towards satisfaction of all sums due or overdue in respect of any Subordinated Debt into which the SWS Preference Shares have converted upon an SWS Preference Share Conversion Event where the holder of such Subordinated Debt has acceded to the STID as a Secured Creditor; and
(xxvii) twenty-seventh, (to the extent required in the Common Terms Agreement) the balance shall remain in the Debt Service Payment Account.
Any payment made by the Issuer to a Secured Creditor pursuant to the Payment Priorities on account of a liability in respect of which SWS is the principal debtor is treated as having discharged SWS’ obligation to make such payment to that Secured Creditor. SWS is also treated as having discharged its related payment obligation to the Issuer under the relevant Issuer/SWS Loan Agreement upon (and to the extent of) the Issuer making a payment pursuant to the Payment Priorities to a Secured Creditor in respect of which the Issuer is the principal debtor.
The Payment Priorities set out in paragraphs (i) to (xxvi) inclusive do not apply to (a) the proceeds of any further borrowing of Permitted Financial Indebtedness which are required by the terms of such borrowing to be applied (i) in repayment or prepayment of any existing Financial Indebtedness of the SWS Financing Group (including Subordinated Debt) or (ii) in redeeming the SWS Preference Shares, in each case, to the extent permitted by the CTA or (b) any return of collateral or premium or up front payment in relation to a Hedging Agreement contemplated in paragraph (xvi) above which will be paid to the relevant Hedge Counterparty directly. In no circumstance is the Issuer entitled to apply monies represented by the Monthly Payment Amount in or towards making a Restricted Payment.
For so long as no Standstill Event is continuing, SWS must, on the date which is seven Business Days prior to each Payment Date (such date, a “Determination Date”), determine whether the aggregate amount of monies then credited to the Debt Service Payment Account is at least equal to the aggregate of all amounts referred to in paragraphs (i) to (xix) inclusive of the Payment Priorities which fall due and payable on such Payment Date taking account of any receipts due from any Hedge Counterparty under any Hedging Agreement on such Payment Date (such aggregate amount, “Scheduled Debt Service”). If the balance on the Debt Service Payment Account on a Determination Date is less than the amount of Scheduled Debt Service falling due on the following Payment Date, then SWS will promptly transfer to the Debt Service Payment Account an amount equal to the shortfall from sums standing to the credit of the Operating Accounts. No amounts may be so transferred to the extent that to do so would cause the aggregate net balance of the Operating Accounts to fall below the then current aggregate net overdraft limit on the Operating Accounts or cause the balance on any Operating Account to fall below the then current gross overdraft limit in respect of such Operating Account. If after making any required transfers from the Operating Accounts the balance on the Debt Service Payment Account would be insufficient to pay any Scheduled Debt Service falling due for payment at items (i) to (vi), (ix) or (xii) of the Payment Priorities (excluding any termination payments under any Hedging Agreements), the Issuer must promptly request a drawing under the DSR Liquidity Facility for payment on the following Payment Date in an amount equal to the shortfall (subject to any limitations in the DSR Liquidity Facility Agreements on drawings applicable to shortfalls relating to Class B Debt).
Until such time as a Standstill commences and is continuing, all amounts payable on any Payment Date must be paid strictly in the order referred to above, to the intent that no amounts falling to be paid under any
158
paragraph may be paid until such time as the amounts falling to be paid on the same date or earlier under each preceding paragraph have been paid in full.
Debt Service Reserve Account and Issuer’s O&M Reserve Account The Issuer will be required to drawdown the whole of a Liquidity Facility Provider’s commitment if that Liquidity Facility Provider (i) ceases to have the Liquidity Facility Requisite Rating or (ii) fails to renew its commitment at the end of the term of the relevant Liquidity Facility and whose commitment is not replaced by another Liquidity Facility Provider. The Issuer must deposit the proceeds of each such drawdown into the Debt Service Reserve Account (in the case of a drawdown under a DSR Liquidity Facility Agreement) or the Issuer’s O&M Reserve Account (in the case of a drawdown under any O&M Reserve Facility). No monies may be withdrawn from the Debt Service Reserve Account or the O&M Reserve Account except as permitted by the relevant Liquidity Facility Agreement (see the “Liquidity Facilities” below) or the Issuer delivers, prior to any withdrawal, a certificate to the Security Trustee and the Account Bank that following the making of such withdrawal (a) in the case of the Debt Service Reserve Account, the aggregate of the amounts standing to the credit of the Debt Service Reserve Account and available for drawing under the DSR Liquidity Facilities is at least equal to the Required Balance and (b) in the case of the Issuer’s O&M Reserve Account, the aggregate of the O&M Reserve and amounts available for drawing under the O&M Facilities is at least equal to the O&M Required Amount.
SWS has agreed to procure that on any Payment Date (save for any date upon which a drawing is to be made under a DSR Liquidity Facility or out of the Debt Service Reserve Account to make a payment into the Debt Service Payment Account):
(a) the aggregate of (i) all amounts available for drawing under the DSR Liquidity Facilities; and (ii) all amounts standing to the credit of the Debt Service Reserve Account (including the value of any Authorised Investments) are equal to the next 12 months’ interest forecast to be due on the Class A Debt of the SWS Financing Group (the “Class A Required Balance”); and
(b) the aggregate of (i) all amounts available for drawing in respect of Class B Debt under the DSR Liquidity Facilities; and (ii) all amounts standing to the credit of the Debt Service Reserve Account (including the value of any Authorised Investments) (after deducting all amounts required in order to satisfy the Class A Required Balance) are equal to the next 12 months’ interest forecast to be due on the Class B Debt (other than in respect of any Subordinated Coupon Amounts) of the SWS Financing Group (the “Class B Required Balance” and, together with the Class A Required Balance, the “Required Balance”).
Authorised Investments The Common Terms Agreement allows SWS and the Issuer to invest in certain eligible Authorised Investments such part of the amounts standing to the credit of any of the Accounts as is prudent and in accordance with certain provisions to be set out in the Common Terms Agreement.
Cash Management during a Standstill Period The arrangements described in “Debt Service Payment Account” above continue to apply until the commencement of a Standstill Period. The Common Terms Agreement provides that, so long as a Standstill Period continues unremedied, and provided no Enforcement Action (other than a Permitted Share Pledge Acceleration) has occurred, SWS shall cease to be the Cash Manager and will be replaced by the Standstill Cash Manager, who shall assume control of the Accounts, pay operating expenditure when it falls due and, on a monthly basis, calculate the aggregate of all payments falling to be made during the next following period of 12 months and shall calculate all net revenues received and/or expected to be received over that 12 month period. To the extent that the forecast revenues are insufficient (after paying all relevant operating expenditure) to pay the aggregate of all payments falling to be made during the next 12 months, the Standstill Cash Manager shall notionally apply those forecast revenues to each category in accordance with the Payment
159
Priorities until the revenue that is forecast to be available is insufficient to meet all of the payments falling to be made within such 12 month period in any paragraph of the Payment Priorities (the “Shortfall Paragraph”) and shall, in respect of those categories of payment falling within the Shortfall Paragraph, divide the anticipated revenues remaining pro rata between those amounts. Throughout the Standstill Period, any payments falling to be made within a category of payment falling within a Shortfall Paragraph shall be satisfied by a payment of the pro rata share of that payment so calculated and no payments falling in a category which (in accordance with the Payment Priorities) falls after a Shortfall Paragraph shall be made (and the balance of the payments not made shall remain outstanding).
The proceeds of enforcement of the Security which is permitted to be enforced during a Standstill Period will also be applied in accordance with the Payment Priorities. In circumstances where such enforcement occurs during a Standstill Period or following termination of a Standstill the proceeds of enforcement will be applied in accordance with the above Payment Priorities but excluding in these circumstances payments under paragraphs (i), (x), (xi) and (xv) thereof.
Security Agreement
Security Each Obligor entered into the security agreement (the “Security Agreement”) with the Security Trustee on the Initial Issue Date pursuant to which SWSH and SWSGH guarantee the obligations of each other Obligor under the Finance Documents and SWS and the Issuer guarantee the obligations of each other under the Finance Documents, in each case to the Security Trustee as security trustee for the Secured Creditors. Each Obligor has secured its property, assets and undertakings to the Security Trustee as trustee for the Secured Creditors. However, in respect of SWS, the creation, perfection and enforcement of such security is subject to the WIA, the Instrument of Appointment and requirements thereunder. As a result of the restrictions placed upon SWS in respect of the giving of security and the Special Administration procedure contained in the WIA, the value, effect and enforceability of the security granted by SWS is severely limited (see Chapter 5 “Risk Factors” and Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales” of this Prospectus for a more detailed discussion of these issues).
The Security Agreement incorporates, to the extent applicable, the provisions of the Common Terms Agreement and is subject to the STID.
The security constituted by the Security Agreement is expressed to include:
(i) first fixed charges over:
(a) the ordinary shares in SWS, SWSH, the Pension Companies and the Issuer;
(b) each Obligor’s right, title and interest from time to time in and to:
(A) any real property interests currently owned by it or acquired after the date of the Security Agreement (other than certain excluded property not exceeding in aggregate £10 million (indexed from the Initial Issue Date)); and
(B) the proceeds of disposal of any land (including Protected Land);
(c) all present and future plant, machinery, office equipment, computers, vehicles and other chattels;
(d) all moneys standing to the credit of each Obligor’s accounts and the debts represented thereby;
(e) any Intellectual Property Rights owned by each Obligor (excluding information technology licence agreements);
(f) any present and future goodwill and any present and future uncalled capital and rights in relation to such uncalled capital;
160
(g) each Authorised Investment;
(h) all shares of any person owned by the Obligor including all dividends, interest and other monies payable in respect thereof and all other rights related thereto;
(i) all present and future book and other debts;
(j) all benefit in respect of Insurances taken out by any Obligor and all claims and returns of premiums in respect thereof; and
(ii) an assignment of each Obligor’s right in respect of Insurances taken out by any Obligor and in respect of its right, title and interest from time to time in and to:
(a) the proceeds of any insurance policies (other than motor insurance, employer’s liability insurance, directors and officers liability insurance, pension fund trustee liability insurance and any other third party liability insurance) and all rights related thereto;
(b) all Transaction Documents and any other document or agreement to which an Obligor is a party; and
(c) all damages, compensation, remuneration, profit, rent or income derived from information technology licence agreements; and
(iii) a first floating charge of the whole of the undertaking, property, assets and rights whatsoever and wheresoever present and future of each Obligor, except that the Security does not include any security over Protected Land (see Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales” under “Protected Land”) or any of SWS’ other assets, property and rights to the extent, and for so long as, the taking of any such security would contravene the terms of the Instrument of Appointment and requirements thereunder or the WIA.
The Security is held on trust by the Security Trustee for itself and on behalf of the Secured Creditors in accordance with and subject to the terms of the STID.
For a description of certain limitations on the ability of SWS to grant security and certain limitations and restrictions on the security purported to be granted, see Chapter 5 “Risk Factors — Certain Legal Considerations — Security” and Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales” — “Restrictions on the granting of security”.
Notice of the creation of the Security has not been and will not be given initially to customers or to contractual counterparties in respect of contracts (other than certain material contracts) and each charge over land as purported to be granted has taken effect in equity only. Accordingly, until notice of the creation of the Security is given to the relevant customers or contractual counterparties or registration is effected with HM Land Registry in respect of registered land or certain other action is taken in respect of unregistered land, to the extent possible any such security or charge may be or become subject to prior equities and/or other legal rights arising in relation thereto.
Neither SWSGH nor SWSH has any significant assets other than the shares in its respective subsidiary.
Security Structure The following shows the security provided by the SWS Financing Group in favour of the Security Trustee on behalf of the Secured Creditors:
161
SECURITY GUARANTEE
Fixed and floating charge SWSGH Guarantees all obligations Principal secured asset is its of SWSH, SWS and the holding of shares in SWSH Issuer under the Finance Documents
Guarantees all Fixed and floating charge SWSH obligations of Principal secured asset is its SWSGH, SWS and the holding of ordinary shares Issuer under the in SWS Finance Documents
Fixed and floating charge SWS Guarantees all over its property, assets and obligations of the Issuer undertaking, all subject to under the Finance the WIA and the Instrument Documents of Appointment
Fixed and floating Guarantees all charge ISS UER obligations of the Issuer under the Finance Documents
Financial Guarantor Documents
The Financial Guarantees of Wrapped Bonds MBIA Assurance S.A., MBIA UK and FSA UK have each in the past issued Financial Guarantees in respect of Wrapped Bonds. (A decision of the Comité des Entreprises d’Assurance (the French insurance regulator) on 27 December 2007 approved the transfer of the business of MBIA Assurance S.A. to MBIA UK Insurance Limited with effect from 28 December 2007 pursuant to article L.324-1 of the French Insurance Code; MBIA UK Insurance Limited has, therefore, assumed all rights and obligations of MBIA Assurance S.A. under the Transaction Documents as if it were the Initial Financial Guarantor of the Series of Wrapped Bonds issued on 23 July 2003 and 27 May 2005.) To the extent that MBIA Assurance S.A, MBIA UK or FSA UK or any other Financial Guarantors issue Financial Guarantees in respect of any further Sub-Classes of Class A Wrapped Bonds and/or Class B Wrapped Bonds, such Financial Guarantees are expected to be issued by such Financial Guarantor(s) on terms substantially similar thereto.
Upon an early redemption of the relevant Class A Wrapped Bonds or an acceleration of the relevant Class A Wrapped Bonds, the relevant Financial Guarantor’s obligations in relation to outstanding Class A Wrapped Bonds issued prior to the date of this Prospectus and the relevant Financial Guarantor’s obligations in relation to Bonds issued after the date of this Prospectus, as the case may be, will continue to be to pay the Guaranteed Amounts as they fall Due for Payment (as defined in the relevant Financial Guarantee) on each Payment Date. Such Guaranteed Amounts are the Issuer’s obligations: (1) to repay on their respective maturity date the outstanding nominal amount of the relevant Class A Wrapped Bonds, as reduced by each amount of principal repaid or prepaid by the Issuer, excluding any additional amount relating to premium, prepayment, early redemption, broken funding indemnities or penalties; and (2) on each Interest Payment Date, to pay the regularly scheduled interest under the relevant Class A Wrapped Bonds due on such Interest Payment Date, excluding any amount relating to prepayment, early redemption, broken-funding indemnities, penalties or
162
default interest or (for Floating Rate Bonds only) any amounts by which the margin on the coupon on such Class A Wrapped Bonds exceeds the initial margin on the coupon as at the date on which such Class A Wrapped Bonds were issued. The relevant Financial Guarantor will not be obliged under any circumstances to accelerate payment under its Financial Guarantees. However, if it does so, it may do so in its absolute discretion in whole or in part, and the amount payable by the relevant Financial Guarantor will be the outstanding principal amount (or pro rata amount that has become due and payable) of the relevant Class A Wrapped Bonds together with accrued interest (excluding always the FG Excepted Amounts). Any amounts due in excess of such outstanding principal amount (and any accrued interest thereon) will not be guaranteed by the relevant Financial Guarantor under any of the Financial Guarantees.
The Bond Trustee will alone have the right to enforce the terms of Financial Guarantees issued in respect of Wrapped Bonds, and any right of any other person to do so is expressly excluded.
Guarantee and Reimbursement Deeds On each relevant Issue Date, the Issuer and SWS will enter into a guarantee and reimbursement deed (each a “G&R Deed”) with the relevant Financial Guarantor, pursuant to which the Issuer will be obliged, among other things, to reimburse such Financial Guarantor in respect of the payments made by it under the relevant Financial Guarantee and to pay, among other things, any financial guarantee fee and fees and expenses of such Financial Guarantor in respect of the provision of the relevant Financial Guarantee. Insofar as a Financial Guarantor makes payment under the relevant Financial Guarantee in respect of Guaranteed Amounts (as defined in such Financial Guarantee), it will be subrogated to the present and future rights of the relevant Wrapped Bondholders or relevant holders of other Wrapped Debt against the Issuer in respect of any payments made.
On the Initial Issue Date and on 27 May 2005, the Issuer and SWS entered into a G&R Deed with MBIA Assurance S.A. in respect of the Class A Wrapped Bonds issued on the Initial Issue Date and 27 May 2005, respectively. (A decision of the Comité des Entreprises d’Assurance (the French insurance regulator) on 27 December 2007 approved the transfer of the business of MBIA Assurance S.A. to MBIA UK Insurance Limited with effect from 28 December 2007 pursuant to article L.324-1 of the French Insurance Code; MBIA UK Insurance Limited has, therefore, assumed all rights and obligations of MBIA Assurance S.A. under the Transaction Documents as if it were the Initial Financial Guarantor of the Series of Wrapped Bonds issued on 23 July 2003 and 27 May 2005.)
On the Fourth Issue Date, the Issuer and SWS entered into a G&R Deed with MBIA UK in respect of the Sub-Class A9 Wrapped Bonds issued on the Fourth Issue Date.
On the Fifth Issue Date, the Issuer and SWS entered into a G&R Deed with FSA UK in respect of the Sub- Class A10 Wrapped Bonds issued on the Fifth Issue Date.
Additional Resources Available
Initial Authorised Credit Facilities and the Second Artesian Term Facility SWS entered into a facility agreement (the “Initial RCF Agreement”) with an aggregate facility amount of £150,000,000 (the “Initial RCF”) with RBS on the Initial Issue Date. The Initial RCF has now been syndicated. Under this facility agreement a £35,000,000 revolving credit facility is available to SWS for working capital requirements and a £115,000,000 revolving credit facility is available to SWS for capital expenditure requirements (in respect of capital expenditure which will qualify for an addition to RCV) from the Initial Issue Date until the final maturity date, currently extended to 25 July 2010. The Initial RCF Agreement was amended and restated on 26 July 2005 to include Commerzbank AG, London Branch, HSBC Bank plc, ING Bank N.V., London Branch, and Sumitomo Mitsui Banking Corporation Europe Limited as additional lenders.
163
Drawings under the revolving credit facilities are subject to various conditions precedent as set out in the related facility agreement, including that no Event of Default or Potential Event of Default is subsisting, and in the case of a roll-over advance no Event of Default is subsisting, and each Repeating Representation is correct at the time of requesting and making the drawing. In the event of a Standstill, any outstanding Advances under the revolving credit facilities shall convert into a term loan repayable on the earliest of (i) the termination of the Standstill; (ii) the final Maturity Date and (iii) the date of any acceleration under, and as permitted by, the STID.
Interest accrues on any drawing under the revolving credit facilities calculated at a daily rate by reference to applicable sterling LIBOR plus a margin and mandatory costs. SWS also pays certain agency, arrangement and underwriting fees and a commitment fee which accrues on any undrawn portion of the commitment under the revolving credit facilities.
The Issuer has also entered into a separate facility agreement with RBS under which RBS advanced to the Issuer a £165,000,000 index-linked term facility (the “Initial Term Facility”). RBS has transferred its rights and obligations in respect of the Initial Term Facility to Artesian Finance II plc (“Artesian II”). The advance under the Initial Term Facility has similar terms to Indexed Bonds in terms of interest accrual and payment, with a final repayment date in September 2033. The Issuer applied the proceeds of such advance in making an index-linked advance to SWS under the Initial Issuer/SWS Loan Agreement. Certain of the Issuer’s payment obligations in respect of the advance under the Initial Term Facility are guaranteed by Financial Security Assurance (U.K.) Limited (“FSA UK”), a Financial Guarantor. The Issuer has given certain indemnities to Artesian II in connection with its funding of the Initial Term Facility.
The Initial RCF and the Initial Term Facility are referred to in this Prospectus as the “Initial Authorised Credit Facilities”.
The Issuer has also entered into a separate facility agreement dated 5 July 2004 (the “Second Artesian Term Facility Agreement”) with RBS under which RBS advanced to the Issuer a £156,484,023.05 index-linked term facility (the “Second Artesian Term Facility”). RBS has transferred its rights and obligations in respect of the Second Artesian Term Facility to Artesian Finance plc (“Artesian”). The advance under the Second Artesian Term Facility has similar terms to Indexed Bonds in terms of interest accrual and payment, with a final repayment date in September 2032. The Issuer applied the proceeds of such advance in making an index- linked advance to SWS under the Second Issuer/SWS Loan Agreement. Certain of the Issuer’s payment obligations in respect of the advance under the Second Artesian Term Facility are guaranteed by FSA UK. The Issuer has given certain indemnities to Artesian in connection with its funding of the Second Artesian Term Facility.
SWS has entered into a revolving credit facility agreement (the “Second Revolving Credit Facility”) with an aggregate facility amount of £120,000,000 arranged by RBS and Bayerische Landesbank, acting through its London Branch on 30 June 2005. The Second Revolving Credit Facility has not yet been drawn by SWS. Each loan under the Second Revolving Credit Facility may be used for SWS’ general corporate purposes.
SWS and the Issuer make representations and warranties, covenants and undertakings to the Initial RCF Providers, Artesian II, Artesian, FSA UK and the Finance Parties party to the Second Revolving Credit Facility (the “Second RCF Providers”) on the terms set out in the Common Terms Agreement. The Initial RCF Providers, Artesian II, Artesian and FSA UK and the Second RCF Providers have acceded to the STID and the CTA.
The Events of Default under the Common Terms Agreement apply under the Initial Authorised Credit Facilities, the Second Artesian Term Facility and the Second Revolving Credit Facility (see “Common Terms Agreement” above).
164
The ability of a lender under an Authorised Credit Facility to accelerate any sums owing to them under the Authorised Credit Facilities upon or following the occurrence of an Event of Default thereunder is subject to the STID.
SWS and/or the Issuer may enter into further Authorised Credit Facilities on terms similar to those in the Initial Authorised Credit Facilities. Each additional Authorised Credit Provider will be given the benefit of the Security and will be required to accede to the STID and the CTA.
SWS and the Issuer have entered into loan insurance and indemnity agreements with FSA UK, under which: the Issuer agrees to reimburse to FSA UK amounts paid by FSA UK under FSA UK’s guarantee of amounts payable by the Issuer under the Initial Term Facility and the Second Artesian Term Facility; the Issuer agrees to pay a fee to FSA UK and to pay, and to indemnify FSA UK against, certain other of FSA UK’s costs and expenses; SWS and the Issuer made representations, warranties and covenants to FSA UK on the terms set out in the Common Terms Agreement; and SWS guarantees to FSA UK the Issuer’s obligations to FSA UK under such agreements.
The Liquidity Facilities The DSR Liquidity Facility provided by The Royal Bank of Scotland plc and Barclays Bank plc (the “Existing DSR Liquidity Facility Providers”) is the only Liquidity Facility in place as at the date of this Prospectus. The Issuer may establish further DSR Liquidity Facilities in connection with further Bonds and other Class A Debt and Class B Debt issued or incurred.
Under the terms of the Existing DSR Liquidity Facility Agreement, the Existing DSR Liquidity Facility Providers provide a 364 day commitment (which may be renewed from time to time, and with the current scheduled termination date being 15 July 2009) in an aggregate amount specified in the DSR Liquidity Facility Agreement to permit drawings to be made by the Issuer, in circumstances where there will be insufficient funds in the Debt Service Payment Account available on a Payment Date to pay amounts (other than principal amounts to be repaid in respect of Class A Debt and principal amounts to be repaid and any Subordinated Coupon Amounts to be paid in respect of Class B Debt or any termination payments under any Hedging Agreements) scheduled to be paid in respect of paragraphs (i) to (vi) inclusive and (ix) and, after deducting any prior ranking payments, (xii) of the Payment Priorities (a “Liquidity Shortfall”).
The Issuer will not be able to make a drawing in respect of a Liquidity Shortfall relating (in whole or in part) to Class B Debt unless the sum of the amount available under the DSR Liquidity Facilities and the amount standing to the credit of the Debt Service Reserve Account (immediately after such drawing) is not less than the next 12 months interest forecast on Class A Debt.
The Issuer may also enter into an O&M Reserve Facility Agreement with one or more Liquidity Facility Providers, drawings under which will be on-lent by the Issuer to SWS to meet SWS’ operating and capital maintenance expenditure requirements to the extent that SWS has insufficient funds available to it to meet these requirements. No O&M Reserve Facility Agreement has been entered into as at the date of this Prospectus.
Each Liquidity Facility Provider must be a bank which as at the relevant Issue Date has the Minimum Short- Term Rating (the “Liquidity Facility Requisite Rating”).
Each Liquidity Facility Provider may be replaced at any time provided that such Liquidity Facility Provider is replaced by a bank with the Liquidity Facility Requisite Rating and all amounts outstanding to such Liquidity Facility Provider are repaid in full.
Each Liquidity Facility Agreement does or will provide that amounts repaid by the Issuer may be redrawn.
Each Liquidity Facility Agreement does or will provide that if (i) at any time the rating of the relevant Liquidity Facility Provider falls below the Liquidity Facility Requisite Rating or (ii) the relevant Liquidity
165
Facility Provider does not agree to renew its commitment under such Liquidity Facility prior to the expiry of the relevant availability period, the Issuer will:
(a) use all reasonable endeavours to replace the relevant Liquidity Facility Provider with a party having the Liquidity Facility Requisite Rating; and
(b) (if a replacement is not made within the relevant time period specified in the relevant Liquidity Facility Agreement) be entitled to require such Liquidity Facility Provider to pay into the Debt Service Reserve Account (in the case of a DSR Liquidity Facility) or the Issuer’s O&M Reserve Account (in the case of an O&M Reserve Facility) the full amount of the relevant Liquidity Facility Provider’s undrawn commitment (a “Standby Drawing”).
A Standby Drawing will generally be repayable only if the relevant Liquidity Facility Provider is re-rated with the Liquidity Facility Requisite Rating or confirmation is received from each of the Rating Agencies that either (i) the terms of a replacement Liquidity Facility or (ii) the absence of any such facility, in each case, as applicable, will not lead to a ratings downgrade of the Bonds from the relevant Rating Agencies.
Interest will accrue on any drawing (including a Standby Drawing) made under a Liquidity Facility provided by a Liquidity Facility Provider at a reference rate per annum plus a margin. Under the Liquidity Facility Agreements, the Issuer, in certain circumstances, will be required to pay additional amounts if: (i) a withholding or deduction for or on account of tax is imposed on payments made by it to the relevant Liquidity Facility Provider; or (ii) if the relevant Liquidity Facility Provider suffers an increase in the cost of providing the relevant Liquidity Facility. Drawings under any further Liquidity Facilities will accrue interest subject to the specific terms of the relevant Liquidity Facility Agreement. The Issuer will also pay certain agency, arrangement and renewal fees as well as a commitment fee which accrue on any undrawn portion of the commitments under the Liquidity Facilities.
Upon the enforcement of the Security pursuant to the STID, all indebtedness outstanding under any Liquidity Facility (other than Subordinated Liquidity Facility Amounts) will rank in priority to the Bonds.
Mezzanine Facility Agreements The Issuer entered into (i) a senior mezzanine facility agreement with, amongst others, The Royal Bank of Scotland plc (as agent), RBEF Limited (as arranger), Royal Bank Investments Limited as the Original Senior Mezzanine Facility Provider and the Security Trustee in an aggregate amount of £127,200,000 (the “Senior Mezzanine Facility Agreement”) and (ii) a junior mezzanine facility agreement with, amongst others, The Royal Bank of Scotland plc (as agent), RBEF Limited (as arranger), Royal Bank Investments Limited as original Junior Mezzanine Facility Provider and the Security Trustee, in an aggregate amount of £106,000,000 (the “Junior Mezzanine Facility Agreement” and, together with the Senior Mezzanine Facility Agreement, the “Mezzanine Facility Agreements”). The Mezzanine Facility Agreements have since been acquired by SWC. The Issuer borrowed the full amount available under the Mezzanine Facility Agreements on the Initial Issue Date and lent the proceeds thereof together with the nominal principal amount of the Bonds issued and borrowings under other Authorised Credit Facilities raised on the Initial Issue Date to SWS under the Initial Issuer/SWS Loan Agreement. SWS applied such loan proceeds, amongst other things, to repay its existing indebtedness to the Issuer and the Issuer applied such repayment proceeds to repay all of its indebtedness under the Bridge Facility Agreement and all of its indebtedness to SWI.
Interest accrues on any drawing under each Mezzanine Facility Agreement, in the case of the Senior Mezzanine Facility, at a floating rate of interest and, in the case of the Junior Mezzanine Facility, at a fixed rate. The Issuer’s obligations to pay floating rate interest are hedged in accordance with the Hedging Agreements entered into on the Initial Issue Date (see “Hedging Agreements” below). The Issuer pays certain agency and arrangement fees under each Mezzanine Facility Agreement.
166
The Issuer has made representations and warranties, covenants and undertakings to the Mezzanine Facility Providers on the terms set out in the Common Terms Agreement. The Events of Default under the Common Terms Agreement apply under the Mezzanine Facility Agreements (see “Common Terms Agreement” above).
The Issuer’s payment obligations are backed by advances owing to the Issuer pursuant to the Initial Issuer/SWS Loan Agreement and the terms of those advances in terms of amounts, interest rates, tenor and payment dates correspond with the relevant advances under the Mezzanine Facility Agreements (or in the case of the Senior Mezzanine Facility, the related Interest Rate Hedging Agreements).
Under the terms of the CTA, neither SWS nor the Issuer is allowed to make any payments of interest, principal or any other amounts under the Mezzanine Facility Agreements or the corresponding advances under the Initial Issuer/SWS Loan Agreement (save for mandatory prepayments in the event of, amongst other things, illegality) unless the Restricted Payment Condition is satisfied or pursuant to a Subordinated Debt Replacement Event.
The claims of the Mezzanine Facility Providers are secured under the terms of the Security Documents but are subordinated to the Class A Debt and the Class B Debt in accordance with the Payment Priorities. In the event of any failure to meet the Restricted Payment Condition on any payment date or if, following satisfaction of the Restricted Payment Condition, there is a shortfall in cash available to pay amounts due and payable under the Mezzanine Facility Agreements, the amount of the shortfall will not be treated as due and instead shall be deferred until the payment date on which the Issuer has sufficient funds to meet such payment or the final maturity date of any outstanding senior debt. The ability of the Mezzanine Facility Providers to accelerate any sums owing to them under the Mezzanine Facility Agreements upon or following the occurrence of an Event of Default is postponed to the rights of the holders of the Class A Debt and the Class B Debt pursuant to the STID.
The Mezzanine Facility Providers are subject to certain call option arrangements in relation to their Mezzanine Debt which may be exercised against them following enforcement of any of the security granted by SWSGH and/or SWSH (see “Security Trust and Intercreditor Deed — Enforcement” above).
SWS Preference Shares SWS has issued (i) fixed dividend (£40 per share net) cumulative redeemable preference shares 2038 of £1 each in the capital of SWS (the “Class A1 Preference Shares”), (ii) non-voting participating cumulative redeemable preference shares 2038 of 1p each in the capital of SWS (the “Class A2 Preference Shares”) and (iii) fixed dividend (£70 per share net) cumulative redeemable preference shares 2038 of £1 each in the capital of SWS (the “Class B Preference Shares” and together with the Class A1 Preference Shares and the Class A2 Preference Shares the “SWS Preference Shares”). The SWS Preference Shares are non-voting save in respect of certain limited matters which are specific to the rights and value of the SWS Preference Shares.
Under the terms of the CTA, SWS is not allowed to make any payments on or under the SWS Preference Shares unless the Restricted Payment Condition is satisfied (see “Common Terms Agreement” above).
The holders of the SWS Preference Shares enjoy certain specific and protective entrenched rights. These can be waived in accordance with the terms and conditions of the SWS Preference Shares and in addition, and amongst other things, will have no effect, and will not require SWS to obtain any consent or sanction of the SWS Preference Shareholders unless the proposed event or action would or could reasonably be expected to have a material adverse effect on the fundamental terms or value of their investment. For example, for so long as neither an Event of Default is continuing nor, if a Trigger Event has occurred and is continuing, has a Remedial Plan concluded that the failure to raise new Financial Indebtedness in the circumstances described below would lead to an Event of Default, in the circumstance where the Mezzanine Facility Providers would have an equivalent Entrenched Right (as described earlier in “Security Trust and Intercreditor Deed — Entrenched Rights of the Mezzanine Facility Providers”), the articles of association of SWS provide that SWS may not agree any modification to, or consent or waiver under or in respect of, any term of any Finance
167
Document if the proposed modification, consent or waiver would permit the raising of new Financial Indebtedness by the SWS Financing Group to the extent that, as a result, the aggregate of the Senior Net Indebtedness and any other net indebtedness ranking in point of priority senior to the Senior Mezzanine Debt would exceed 90 per cent. of RCV, unless the Security Trustee has received consent from the holders of more than 50 per cent. of the aggregate nominal value of all classes of SWS Preference Shareholders or the sanction of an ordinary resolution passed at a separate general meeting of the holders of all classes of the SWS Preference Shares. Certain of these other key rights are also disapplied following an Event of Default.
The SWS Preference Shares may in certain circumstances be converted into Subordinated Debt of SWS, whereupon the holders of such Subordinated Debt will be required either to accede to the STID and the CTA for the purposes of, inter alia, taking the benefit of the Security and subordinating their secured claims to those of the holders of the Class A Debt, the Class B Debt and the Mezzanine Debt or to accede to the SWS Preference Share Deed (as defined below) for the purpose of, inter alia, restricting their right to accelerate their unsecured claims during a Standstill Period.
The initial holders of the SWS Preference Shares entered into a deed on the Initial Issue Date with the Security Trustee and the Obligors (the “SWS Preference Share Deed”) pursuant to which SWS agreed not to, and such holders of the SWS Preference Shares agreed not to permit or require SWS to, make any Distribution in respect of the SWS Preference Shares unless the Restricted Payment Condition is satisfied at such time and payments made in breach of the Restricted Payment Condition shall be immediately repaid to the Security Trustee and pending such repayment shall be held on trust for the Security Trustee. Under call option arrangements contained in the SWS Preference Share Deed, each holder of the SWS Preference Shares (other than the Class A2 Preference Shares) will be required to sell its SWS Preference Shares to any person who acquires the ordinary shares in SWSH or SWS following an enforcement of the Security granted by SWSGH or SWSH (or to any nominee of such person) for a consideration calculated to ensure that the price that such holder of the SWS Preference Shares receives will not be less than the price it would have received for its holding had its SWS Preference Shares been charged in favour of the Security Trustee as security for Secured Liabilities and sold as part of any disposal of the Security Assets on an enforcement of the Security granted by SWSGH and/or SWSH. In this event, the rights of the holders of the Class A2 Preference Shares will be deferred.
SWC owns the Class A1 Preference Shares and the Class B Preference Shares. SWI owns the Class A2 Preference Shares. Each of SWC and SWI has acceded to the SWS Preference Share Deed.
Hedging Agreements
Hedging Policy The Hedging Policy provides that the SWS Financing Group must enter into Hedging Agreements in accordance with the Hedging Policy and that the only member of the SWS Financing Group that may enter into Hedging Agreements is the Issuer, provided that the Issuer may enter into back-to-back swap arrangements with SWS in respect of Hedging Agreements entered into by the Issuer to hedge the obligations of SWS under Finance Leases or any other Authorised Credit Facility raised by SWS or which are otherwise not directly linked to the raising of new debt under an Authorised Credit Facility.
However, STID Proposals have been granted allowing SWS to enter into Hedging Agreements in connection with the Second Revolving Credit Facility.
The Hedging Policy provides, inter alia, that:
1. The SWS Financing Group will not enter into Treasury Transactions for the purpose of speculation, but rather only to manage risk inherent in its business or funding on a prudent basis. 2. Any change to the Hedging Policy will be subject to SWS board approval and may only be made with the approval of the Security Trustee (such approval not to be unreasonably withheld).
168
3. Subject to such approvals, the Hedging Policy will be reviewed from time to time by the SWS Financing Group and amended (subject to Entrenched Rights and Reserved Matters and in accordance with the provisions of the STID) as appropriate in line with market developments, regulatory developments, and Good Industry Practice. 4. The SWS Financing Group must not bear currency risk in respect of any foreign currency denominated debt instruments, or in respect of any significant foreign currency purchases. 5. The SWS Financing Group must hedge its exposure to interest rate risk on at least 85 per cent. of its total outstanding debt liabilities for the current period to the next Periodic Review and at least 70 per cent. in the next period to the subsequent Periodic Review (each to be adjusted to the extent that the period from one Periodic Review to the next Periodic Review is greater than five years) (on a rolling basis). This figure will be kept under review with respect to market conditions and developments in regulatory methodology and practice. 6. Interest rate risk on floating rate liabilities may be hedged through a combination of cash balances. Authorised Investments and instruments such as interest rate swaps entered into by the Issuer. 7. The SWS Financing Group may manage its exposure to inflation risk through the use of index- linked instruments where it is cost effective. 8. The Issuer may only enter into Treasury Transactions with counterparties whose short-term, unsecured and unsubordinated debt obligations are assigned a rating by the Rating Agencies which is no less than the Minimum Short-term Rating and whose long-term, unsecured and unsubordinated debt obligations are assigned a rating by Moody’s of at least A2 (the “Moody’s Minimum Long-term Rating”), or where a parent guarantee is provided by an institution which meets the same criteria. Each Hedging Agreement is to include a provision entitling the Issuer to terminate if there is a Hedge Counterparty Downgrade as described below. 9. Hedging Agreements must be entered into in the form, as amended by the parties thereto, of the 1992 ISDA Master Agreement (Multicurrency — Cross Border), the 2002 Master Agreement published by ISDA or any successor thereto published by ISDA unless otherwise agreed by the Security Trustee.
Hedging Agreements The Existing Hedging Agreements
The Issuer has entered into various interest rate and currency swap transactions with the Initial Hedge Counterparties (the “Existing Hedging Agreements”) in conformity with the Hedging Policy.
SWS Hedging Agreements SWS has entered into various interest rate swap transactions with RBS and Citibank N.A., London Branch in connection with the Second Revolving Credit Facility (the “SWS Hedging Agreements”).
Tax Each Hedge Counterparty is obliged to make payments under the Hedging Agreements without any withholding or deduction of taxes, unless required by law. If any such withholding or deduction is required by law, a Hedge Counterparty will be required to pay any such additional amount as is necessary to ensure that the net amount received by the Issuer (or, in the case of the SWS Hedging Agreements, SWS) will equal the full amount the Issuer (or, in the case of the SWS Hedging Agreements, SWS) would have received had no such deduction or withholding been required. The Issuer (or, in the case of the SWS Hedging Agreements, SWS) will make payments under the Hedging Agreements subject to any withholding or deduction of taxes required by law, but will not be required to pay any additional amount to any Hedge Counterparty in respect thereof. However, in either case, if a withholding or deduction is required due to any action by a taxing
169
authority, or change in tax law after the date on which a transaction is entered into, which cannot be avoided in accordance with the relevant Hedging Agreement, the Hedge Counterparty may terminate the relevant Hedging Agreement.
Termination The Issuer (or, in the case of the SWS Hedging Agreements, SWS) will be entitled to terminate a Hedging Agreement in certain circumstances (including a failure to pay by the Hedge Counterparty, certain insolvency events affecting the Hedge Counterparty and certain rating downgrade events affecting the Hedge Counterparty).
The Hedge Counterparty will be entitled to terminate a Hedging Agreement only in certain limited circumstances being:
– a failure by the Issuer (or, in the case of the SWS Hedging Agreements, SWS) to make payment when due;
– certain insolvency events affecting the Issuer (or, in the case of the SWS Hedging Agreements, SWS);
– illegality affecting the Hedging Agreement;
– certain tax events (including as described above);
– redemption in whole or in part of any Sub-Class of the Bonds hedged by such Treasury Transaction;
– termination of a Standstill Period (except by virtue of remedy, revocation or waiver of the relevant Event of Default giving rise to the Standstill Period) or, if earlier, an Acceleration of any Sub-Class of the Bonds hedged by such Treasury Transaction pursuant to Condition 11 of the Bonds; and
– (subject to the provisions described below) upon the exercise of an option to terminate a Hedging Agreement on the tenth anniversary of the effective date of the relevant Hedging Transaction or at five yearly intervals thereafter.
The Issuer may enter into Treasury Transactions with Hedge Counterparties pursuant to which each relevant Hedge Counterparty has the right to terminate the relevant Treasury Transaction on the tenth anniversary of the effective date of such Treasury Transaction and thereafter no more frequently than at five-yearly intervals provided that (a) the relevant Hedge Counterparty gives the Issuer at least one year’s prior notice in writing of its intention to exercise such right of termination; and (b) the aggregate notional amount and/or sterling currency amounts (as applicable) of Treasury Transactions pursuant to which Hedge Counterparties have such right of termination does not exceed 10 per cent. of RCV.
Within three months of the receipt of a notice of termination from the relevant Hedge Counterparty, the Issuer shall use all reasonable endeavours to enter into new Treasury Transaction(s) in order to replace the Treasury Transaction which is the subject of such notice of termination.
In the event that a Hedging Agreement or a Treasury Transaction is terminated, a termination payment may be due from the Issuer.
Hedge Counterparty Rating Downgrade If a Hedge Counterparty falls below the Minimum Short-term Rating or the Moody’s Minimum Long-term Rating (a “Hedge Counterparty Downgrade”) and as a result of such Hedge Counterparty Downgrade the then current rating of the Class A Unwrapped Bonds (or, if no Class A Unwrapped Bonds are outstanding, the then current shadow rating of the Class A Wrapped Bonds or, if there are no Class A Bonds outstanding, the then current rating of the Class B Unwrapped Bonds, or if there are no Class A Bonds or Class B Unwrapped Bonds outstanding, the then current shadow rating of the Class B Wrapped Bonds) would be downgraded or placed under review for possible downgrade by any of the Rating Agencies (a “Bond Downgrade”) and the Hedge Counterparty has not, within 30 days of being notified of such Bond Downgrade, at its own cost either:
170
(a) procured that its obligations with respect to the relevant Hedging Agreement are guaranteed by a third party which has a rating of no less than the relevant Minimum Short-term Rating and the Moody’s Minimum Long-term Rating; or
(b) put in place an appropriate mark-to-market collateral agreement in accordance with the requirements specified in the relevant Hedging Agreement in support of its obligations under the relevant Hedging Agreement; or
(c) transferred all of its rights and obligations under the Hedging Agreement to a replacement third party which is rated no less than the Minimum Short-term Rating and the Moody’s Minimum Long-term Rating; or
(d) taken such other action as the Hedge Counterparty agrees which will result in the rating (or shadow rating, as applicable) of the relevant Bonds being restored to the level they were immediately prior to the Hedge Counterparty Downgrade,
then the Issuer shall be entitled to terminate the relevant Hedging Agreement.
Other Transaction Documents
Account Bank Agreement Pursuant to the Account Bank Agreement, the Account Bank has agreed to hold the Accounts and operate them in accordance with the instructions of the Cash Manager or Standstill Cash Manager (as applicable). The Cash Manager or Standstill Cash Manager (as applicable) will manage the Accounts on behalf of the SWS Financing Group pursuant to the Common Terms Agreement (see “Cash Management” above).
Registered Office Agreement Pursuant to a registered office agreement entered into between the Issuer and M&C Corporate Services Limited on 1 January 2002 (the “Registered Office Agreement”), M&C Corporate Services Limited and/or Maples and Calder provide certain corporate services to the Issuer.
Tax Deeds of Covenant
SW Tax Deed of Covenant Under the terms of the SW Tax Deed of Covenant, each Obligor has given certain representations and covenants as to its tax status and to the effect that, subject to SWS’ membership of the SWS VAT Group, it has not taken and, save in certain permitted circumstances, will not take any steps which might reasonably be expected to give rise to a liability to tax for an Obligor where that tax is primarily the liability of another person. Certain other companies including SWC and SWI have also represented and covenanted that they have not taken nor will take any steps which might reasonably be expected to give rise to a liability for tax for an Obligor where that tax is primarily the liability of another person.
With a view to preventing a liability to tax arising for an Obligor which is primarily the liability of another person, SWI (among others) will, under the SW Tax Deed of Covenant, incur certain obligations in relation to specified events and any change in tax residence of the Obligors. For example, the SW Tax Deed of Covenant provides that in certain circumstances where it is anticipated that there will be a change of control for tax purposes of SWSGH and therefore of the Obligors (say, as a result of the sale of shares in SWC or SWI), SWI can be required, as a condition of that sale, to deposit an amount in a trust account equal to the estimated tax liability (if any) arising or likely to arise in an Obligor as a result of the sale. The money deposited could then be used to pay the tax liability of the Obligor.
Shareholder Tax Deed of Covenant Under the terms of the Shareholder Tax Deed of Covenant, each of Veolia Environnement S.A. and RBSG (each of which was then an indirect shareholder of SWS), covenanted to the Security Trustee that it and the
171
companies which are controlled by it for tax purposes (excluding in the case of RBSG, SWC, SWI and their Subsidiaries) have not taken and will not take any steps which might reasonably be expected to give rise to a liability to tax for the Obligors where that tax is primarily the liability of a company controlled by it (excluding in the case of RBSG, SWC, SWI and their Subsidiaries).
A form of new shareholder tax deed of covenant was agreed between the Security Trustee, Greensands Holdings Limited and Greensands Investment Limited, but has to date not been executed.
SWS/SWSG Loan Agreement SWSG is indebted to SWS in the principal amount of approximately £800,000,000 (the “SWS/SWSG Loan”). The terms of the SWS/SWSG Loan are set out in a loan agreement entered into between SWS and SWSG on the Initial Issue Date (the “SWS/SWSG Loan Agreement”). Interest accrues on the SWS/SWSG Loan at the rate of 7 per cent. per annum payable quarterly to the extent that SWSG has on such interest payment date received on such date a dividend from SWS (through SWSH and SWSGH) and/or a payment from SWS for a Permitted Tax Loss Transaction, in each case paid by SWS solely for the purpose of enabling SWSG to meet its scheduled payment obligations under the SWS/SWSG Loan (such dividend payment or payment for a Permitted Tax Loss Transaction a “SWS/SWSG Debt Service Distribution”). Interest will roll-up to the extent that SWSG is not put in funds to meet its scheduled payment obligations and the unpaid amount will itself accrue interest at the relevant interest rate.
The SWS/SWSG Loan is secured by a full first ranking debenture granted by SWSG in favour of SWS on the Initial Issue Date creating, inter alia, a first fixed charge over SWSG’s shares in SWSGH and related rights, a first fixed charge over SWSG’s bank account with the Account Bank into which any SWS/SWSG Debt Service Distribution to it is paid and a first floating charge over all of SWSG’s assets, revenues and undertakings. The security will not operate as a fetter on SWSG’s ability to dispose of the shares in SWSGH provided that the proceeds from such disposal are sufficient to enable SWSG to repay all amounts outstanding under the SWS/SWSG Loan Agreement.
No SWS/SWSG Debt Service Distribution may be made unless, among other things (a) in the case of a dividend payment, the dividend has been validly declared; (b) in the case of a payment for Permitted Tax Loss Transaction, the payment when made complies in all respects with the SW Tax Deed of Covenant and the CTA; (c) each payment is made against irrevocable payment instructions from SWSG directing the Account Bank to remit the proceeds of such payment on receipt by SWSG directly to an Operating Account of SWS for same day value; (d) no Event of Default is subsisting or would result from the payment; and (e) no event of default under the SWS/SWSG Loan Agreement has occurred and is continuing.
An event of default under the SWS/SWSG Loan Agreement will occur and the security granted by SWSG will become immediately enforceable if SWSG defaults on any of its payment obligations to pay interest or principal, breaches any warranty or covenant contained in the SWS/SWSG Loan Agreement or SWSG commits a TDC Breach (as defined in the SW Tax Deed of Covenant) which has a material adverse effect, becomes insolvent or if the security granted by SWSG becomes invalid.
172
CHAPTER 8 THE BONDS
Terms and Conditions of the Bonds The following is the text of the terms and conditions which (subject to completion and amendment and as supplemented or varied in accordance with the provisions of the relevant Final Terms (as defined below) and, save for the italicised paragraphs) will be incorporated by reference into each Global Bond (as defined below) representing Bonds (as defined below) in bearer form, Bonds in definitive form (if any) issued in exchange for the Global Bond(s) representing Bonds in bearer form, each Global Bond Certificate (as defined below) representing Bonds in registered form and each Individual Bond Certificate (as defined below) representing Bonds in registered form (only if such incorporation by reference is permitted by the rules of the relevant stock exchange and agreed by the Issuer). If such incorporation by reference is not so permitted and agreed, each Bond in bearer form and each Individual Bond Certificate representing Bonds in registered form will have endorsed thereon or attached thereto such text (as so completed, amended, varied or supplemented). Further information with respect to each Tranche (as defined below) of Bonds will be given in Part A of the relevant Final Terms which will provide for those aspects of these Conditions which are applicable to such Tranche (as defined below) of Bonds, including, in the case of Wrapped Bonds (as defined below), the form of Financial Guarantee (as defined below) and endorsement and, in the case of all Sub-Classes (as defined below), the terms of the relevant advance under the relevant Issuer/SWS Loan Agreement. If a Financial Guarantor (as defined below) is appointed in relation to any Sub-Class of Wrapped Bonds (as specified in the relevant Final Terms), a supplement to this Prospectus will be produced providing such information about such Financial Guarantor as may be required by the rules of the UK Listing Authority, the London Stock Exchange or such other listing authority or stock exchange on which such Bonds are admitted to listing and/or trading. References in the Conditions to “Bonds” are, as the context requires, references to the Bonds of one Sub-Class only, not to all Bonds which may be issued under the Programme.
Southern Water Services (Finance) Limited (the “Issuer”) has established a guaranteed bond programme (the “Programme”) for the issuance of up to £6,000,000,000 guaranteed bonds (the “Bonds”). Bonds issued under the Programme on a particular Issue Date comprise a Series (a “Series”), and each Series comprises one or more Classes of Bonds (each a “Class”). Each Class may comprise one or more sub-classes (each a “Sub-Class”) and each Sub-Class comprising one or more tranche (each a “Tranche”).
The guaranteed wrapped bonds will be designated as “Class A Wrapped Bonds” or “Class B Wrapped Bonds”. The guaranteed unwrapped bonds will be designated as “Class A Unwrapped Bonds” (and together with the “Class A Wrapped Bonds”, the “Class A Bonds”) or “Class B Unwrapped Bonds” (and together with the “Class B Wrapped Bonds”, the “Class B Bonds”). Each Sub-Class will be denominated in different currencies or having different interest rates, maturity dates or other terms. Bonds of any Class may be zero coupon (“Zero Coupon Bonds”), fixed rate (“Fixed Rate Bonds”), floating rate (“Floating Rate Bonds”), index-linked (“Indexed Bonds”), dual currency bonds (“Dual Currency Bonds”), partly paid bonds (“Partly Paid Bonds”) or instalment bonds (“Instalment Bonds”) depending on the method of calculating interest payable in respect of such Bonds and may be denominated in sterling, euro, U.S. dollars or in other currencies subject to compliance with applicable law.
The terms and conditions applicable to any particular Sub-Class of Bonds are these terms and conditions (“Conditions”) as supplemented, amended and/or replaced by a set of final terms in relation to such Sub- Class (“Final Terms”). In the event of any inconsistency between these Conditions and the relevant Final Terms, the relevant Final Terms shall prevail.
The Final Terms for this Bond (or the relevant provisions thereof) supplement these Conditions and may specify other terms and conditions which shall, to the extent so specified or to the extent inconsistent with these Conditions, replace or modify these Conditions for the purposes of this Bond. Reference to the “Final Terms” is to the Final Terms (or the relevant provisions thereof) applicable to this Bond.
173
The Bonds are subject to and have the benefit of a trust deed dated the Initial Issue Date (as defined below) (as amended by a Deed of Amendment dated 20 May 2005, as further amended by a Second Deed of Amendment dated 13 October 2006, as further amended by a Third Deed of Amendment dated 27 February 2009 and as further amended, supplemented, restated and/or novated from time to time, the “Bond Trust Deed”) between, among others, the Issuer, MBIA UK or another Financial Guarantor (as defined below) acceding thereto and Deutsche Trustee Company Limited as trustee (the “Bond Trustee”, which expression includes the trustee or trustees for the time being of the Bond Trust Deed).
The Class A Wrapped Bonds and the Class B Wrapped Bonds (each “Wrapped Bonds”) alone will be unconditionally and irrevocably guaranteed as to scheduled payments of principal and interest (as adjusted for indexation, as applicable, but excluding any additional amounts relating to premium, prepayment or acceleration, accelerated amounts and amounts (if any) by which, in the case of Fixed Rate Bonds or Indexed Bonds (other than deferred interest), the Coupons (as defined below) exceed the initial Coupons on such Sub- Class as at the relevant Issue Date (as defined in Condition 6(i) (Definitions)), and, in the case of Floating Rate Bonds, the Margin on the Coupons (as defined below) exceeds the initial Margin on the Coupons on such Sub-Class as at the relevant Issue Date (as defined in Condition 6(i) (Definitions)) (in each case, the “Subordinated Coupon Amounts”), all such amounts being the “FG Excepted Amounts”) pursuant to a financial guarantee (each, a “Financial Guarantee”) to be issued by a financial guarantor (each such financial guarantor being a “Financial Guarantor”) in conjunction with the issue of each Sub-Class of Bonds.
Neither of the Class A Unwrapped Bonds nor the Class B Unwrapped Bonds (each “Unwrapped Bonds”) will have the benefit of any such Financial Guarantee.
The Bonds have the benefit (to the extent applicable) of an agency agreement (as amended, supplemented and/or restated from time to time, the “Agency Agreement”) dated the Initial Issue Date (to which the Issuer, the Bond Trustee, the Principal Paying Agent and the other Paying Agents (in the case of Bearer Bonds) or the Transfer Agents and the Registrar (in the case of Registered Bonds) are party). As used herein, each of “Principal Paying Agent”, “Paying Agents”, “Agent Bank”, “Transfer Agents” and/or “Registrar” means, in relation to the Bonds, the persons specified in the Agency Agreement as the Principal Paying Agent, Paying Agents, Agent Bank, Transfer Agents and/or Registrar, respectively, and, in each case, any successor to such person in such capacity. The Bonds may also have the benefit (to the extent applicable) of a calculation agency agreement (in the form or substantially in the form of Schedule 1 to the Agency Agreement, the “Calculation Agency Agreement”) between, inter alia, the Issuer and any calculation agent appointed by the Issuer as calculation agent (the “Calculation Agent”).
On 23 July 2003 (the “Initial Issue Date”), the Issuer entered into a security agreement (the “Security Agreement”) with Deutsche Trustee Company Limited as security trustee (the “Security Trustee”), pursuant to which the Issuer granted certain fixed and floating charge security (the “Issuer Security”) to the Security Trustee for itself and on behalf of the other Secured Creditors (as defined below), the Bond Trustee (for itself and on behalf of the Bondholders), the Bondholders, each Financial Guarantor, the Issuer, each Liquidity Facility Provider, the Hedge Counterparties, the Initial Authorised Credit Facility Arranger, the Liquidity Facility Agents, the Initial Authorised Credit Facility Agent, the Initial Authorised Credit Provider and each Authorised Credit Provider (as defined below), each Agent, the Cash Manager (other than when the Cash Manager is SWS), the Standstill Cash Manager, any Additional Secured Creditors (each as defined therein) and the Mezzanine Finance Parties (together, the “Secured Creditors”). On the Initial Issue Date, the Issuer entered into a security trust and intercreditor deed (the “STID”) with, among others, the Security Trustee and other Secured Creditors and pursuant to which the Security Trustee holds the Security on trust for the Secured Creditors and the Secured Creditors agree to certain intercreditor arrangements.
On or about the date of this Prospectus, the Issuer entered into an amended and restated Dealership Agreement (the “Dealership Agreement”) with the dealers named therein (the “Dealers”) in respect of the Programme, pursuant to which any of the Dealers may enter into a subscription agreement in relation to each
174
Sub-Class of Bonds issued by the Issuer, and pursuant to which the Dealers have agreed to subscribe for the relevant Sub-Class of Bonds on behalf of the Issuer. In any subscriptions agreement relating to a Sub-Class of Bonds, any of the Dealers may agree to procure subscribers to subscribe for the relevant Sub-Class of Bonds.
On the Initial Issue Date, the Issuer entered into a common terms agreement (the “Common Terms Agreement”) with, among others, the Security Trustee, pursuant to which the Issuer makes certain representations, warranties and covenants and which sets out in Schedule 7 thereof the Events of Default (as defined therein) in relation to the Bonds.
The Issuer has entered or may enter into liquidity facility agreements (together, the “Liquidity Facility Agreements”) with certain liquidity facility providers (together, the “Liquidity Facility Providers”) pursuant to which the Liquidity Facility Providers agree to make certain facilities available to meet liquidity shortfalls (including debt service liquidity shortfalls and shortfalls in operating and maintenance expenditure of SWS).
The Issuer has entered or may enter into certain revolving credit facilities (together, the “Authorised Credit Facilities”) with certain lenders (the “Authorised Credit Providers”), pursuant to which the Authorised Credit Providers agree to make certain facilities available to the Issuer for the purpose of funding certain working capital, capital expenditure and other expenses.
The Issuer has entered or may enter into certain currency and interest rate hedging agreements (together, the “Hedging Agreements”) with certain hedge counterparties (together the “Hedge Counterparties”) in respect of certain Sub-Classes of Bonds and Authorised Credit Facilities, pursuant to which the Issuer hedges certain of its currency and interest rate obligations.
The Bond Trust Deed, the Bonds (including the applicable Final Terms), the Security Agreement, the STID (the STID, the Security Agreement and any other documentation evidencing or creating security over any asset of an Obligor to a Secured Creditor under the Finance Documents being together the “Security Documents”), the Financial Guarantee Fee Letters, the Finance Lease Documents, the Agency Agreement, the Liquidity Facility Agreements, the Hedging Agreements, the Initial Term Facility Agreement, the Initial RCF Agreement, the Second Artesian Term Facility Agreement, the Issuer/SWS Loan Agreements, the G&R Deeds, the Financial Guarantees, the Common Terms Agreement, the Mezzanine Facility Agreements, the CP Agreement, any other Authorised Credit Facilities, the master definitions agreement between, among others, the Issuer and the Security Trustee dated the Initial Issue Date (as amended, supplemented and/or restated from time to time, the “Master Definitions Agreement”), the account bank agreement between, among others, the account bank, the Issuer and the Security Trustee (the “Account Bank Agreement”), the Tax Deeds of Covenant and the indemnification deed between, among others, the Financial Guarantor(s) and the Dealers dated 18 July 2003 (as amended from time to time) (the “Indemnification Deed”), the SWS Preference Share Deed, the SWS/SWSG Loan Agreement and any related security document (each, if not defined above, as defined below or in the Master Definitions Agreement) are, in relation to the Bonds, (and together with each other agreement or instrument between SWS or the Issuer (as applicable) and an Additional Secured Creditor designated as a Finance Document by SWS or the Issuer (as applicable), the Security Trustee and such Additional Secured Creditor in the Accession Memorandum of such Additional Secured Creditor) together referred to as the “Finance Documents”.
Terms not defined in these Conditions have the meaning set out in the Master Definitions Agreement.
Certain statements in these Conditions are summaries of the detailed provisions appearing on the face of the Bonds (which expression shall include the body thereof), in the relevant Final Terms or in the Bond Trust Deed, the Security Agreement or the STID. Copies of, inter alia, the Finance Documents are available for inspection during normal business hours at the specified offices of the Principal Paying Agent (in the case of bearer Bonds) or the specified offices of the Transfer Agents and the Registrar (in the case of registered Bonds), save that, if this Bond is an unlisted Bond of any Sub-Class, the applicable Final Terms will only be
175
obtainable by a Bondholder holding one or more unlisted Bonds of that Sub-Class and such Bondholder must provide evidence satisfactory to the Issuer and the relevant Agent as to its holding of such Bonds and identity.
The Bondholders (as defined below) are entitled to the benefit of, are bound by, and are deemed to have notice of, all the provisions of the Bond Trust Deed, the STID, the Security Agreement, the Common Terms Agreement and the relevant Final Terms and to have notice of those provisions of the Agency Agreement and the other Finance Documents applicable to them.
Any reference in these conditions to a matter being “specified” means as the same may specified in the relevant Final Terms.
1 Form, Denomination and Title
(a) Form and Denomination
The Bonds are in bearer form (“Bearer Bonds”) or in registered form (“Registered Bonds”) as specified in the applicable Final Terms and, serially numbered in the Specified Denomination(s) provided that in the case of any Bonds which are to be admitted to trading on a regulated market within the European Economic Area or offered to the public in a Member State of the European Economic Area in circumstances which require the publication of a prospectus under the Prospectus Directive, the minimum Specified Denomination shall be €50,000 (or its equivalent in any other currency as at the date of issue of the relevant Bonds). Bonds of one Specified Denomination may not be exchanged for Bonds of another Specified Denomination and Bearer Bonds may not be exchanged for Registered Bonds and vice versa. References in these Conditions to “Bonds” include Bearer Bonds and Registered Bonds and all Sub-Classes, classes, Tranches and Series.
Interest-bearing Bearer Bonds are issued with Coupons (as defined below) (and, where appropriate, a Talon, (as defined below)) attached. After all the Coupons attached to, or issued in respect of, any Bearer Bond which was issued with a Talon have matured, a coupon sheet comprising further Coupons (other than Coupons which would be void) and (if necessary) one further Talon will be issued against presentation of the relevant Talon at the specified office of any Paying Agent. Any Bearer Bond the principal amount of which is redeemable in instalments may be issued with one or more Receipts (as defined below) (and, where appropriate, a Talon) attached thereto. After all the Receipts attached to, or issued in respect of, any Instalment Bond which was issued with a Talon have matured, a receipt sheet comprising further Receipts (other than Receipts which would be void) and (if necessary) a further Talon will be issued against presentation of the relevant Talon at the specified office of any Paying Agent.
(b) Title
Title to Bearer Bonds, Coupons, Receipts and Talons (if any) passes by delivery. Title to Registered Bonds passes by registration in the register (the “Register”), which the Issuer shall procure to be kept by the Registrar.
In these Conditions, subject as provided below, each “Bondholder” (in relation to a Bond, Coupon, Receipt or Talon), “holder” and “Holder” means (i) in relation to a Bearer Bond, the bearer of any Bearer Bond, Coupon, Receipt or Talon (as the case may be) and (ii) in relation to Registered Bond, the person in whose name a Registered Bond is registered, as the case may be. The expressions “Bondholder”, “holder” and “Holder” include the holders of instalment receipts (which, in relation to Class A Bonds will be “Class A Receipts”, in relation to Class B Bonds, “Class B Receipts” and together, the “Receipts”) appertaining to the payment of principal by instalments (if any) attached to such Bonds in bearer form (the “Receiptholders”), the holders of the coupons (which, in relation to Class A Bonds will be “Class A Coupons”, in relation to Class B Bonds, “Class B Coupons” and together, the “Coupons”) (if any) appertaining to interest bearing Bonds in bearer form (the
176
“Couponholders”), and the expression Couponholders or Receiptholders includes the holders of talons in relation to Coupons or Receipts as applicable, (which, in relation to Class A Bonds will be “Class A Talons”, in relation to Class B Bonds, “Class B Talons” and together, the “Talons”) (if any) for further coupons or receipts, as applicable attached to such Bonds (the “Talonholders”).
The bearer of any Bearer Bond, Coupon, Receipt or Talon and the registered holder of any Registered Bond will (except as otherwise required by law) be treated as its absolute owner for all purposes (whether or not it is overdue and regardless of any notice of. ownership, trust or any interest in it, any writing on the relevant Bond, or its theft or loss or any express or constructive notice of any claim by any other person of any interest therein other than, in the case of a Registered Bond, a duly executed transfer of such Bond in the form endorsed on the Bond Certificate in respect thereof) and no person will be liable for so treating the holder.
Bonds which are represented by a Global Bond or Global Bond Certificate will be transferable only in accordance with the rules and procedures for the time being of Euroclear and Clearstream, Luxembourg, as the case may be. References to Euroclear and/or Clearstream, Luxembourg shall, whenever the context so permits, be deemed to include a reference to any additional or alternative clearing system specified in the applicable Final Terms or as may otherwise be approved by the Issuer, the Principal Paying Agent and the Bond Trustee.
(c) Fungible Issues of Bonds comprising a Sub-Class
A Sub-Class of Bonds may comprise a number of issues in addition to the initial Tranche of such Sub- Class, each of which will be issued on identical terms save for the first interest payment, the Issue Date and the Issue Price. Such further issues of the same Sub-Class will be consolidated and form a Series with the prior issues of that Sub-Class.
2 Exchanges of Bearer Bonds for Registered Bonds and Transfers of Registered Bonds
(a) Exchange of Bonds
Subject to Condition 2(e) (Closed Periods), Bearer Bonds may, if so specified in the relevant Final Terms, be exchanged at the expense of the transferor Bondholder for the same aggregate principal amount of Registered Bonds at the request in writing of the relevant Bondholder and upon surrender of the Bearer Bond to be exchanged together with all unmatured Coupons, Receipts and Talons (if any) relating to it at the specified office of the Registrar or any Transfer Agent or Paying Agent. Where, however, a Bearer Bond is surrendered for exchange after the Record Date (as defined below) for any payment of interest or Interest Amount (as defined below), the Coupon in respect of that payment of interest or Interest Amount need not be surrendered with it Registered Bonds may not be exchanged for Bearer Bonds.
(b) Transfer of Registered Bonds
A Registered Bond may be transferred upon the surrender of the relevant Individual Bond Certificate, together with the form of transfer endorsed on it duly completed and executed, at the specified office of any Transfer Agent or the Registrar. However, a Registered Bond may not be transferred unless (i) the principal amount of Registered Bonds proposed to be transferred and (ii) the principal amount of the Registered Bonds proposed to be the principal amount of the balance of Registered Bonds to be retained by the relevant transferor are, in each case, Authorised Denominations. In the case of a transfer of part only of a holding of Registered Bonds represented by an Individual Bond Certificate, a new Individual Bond Certificate in respect of the balance not transferred will be issued to the transferor within three business days (in the place of the specified office of the Transfer Agent or the Registrar) of receipt of such form of transfer.
177
(c) Delivery of New Individual Bond Certificates
Each new Individual Bond Certificate to be issued upon exchange of Bearer Bonds or transfer of Registered Bonds will, within three business days (in the place of the specified office of the Transfer Agent or the Registrar) of receipt of such request for exchange or form of transfer, be available for delivery at the specified office of the Transfer Agent or the Registrar stipulated in the request for exchange or form of transfer, or be mailed at the risk of the Bondholder entitled to the Individual Bond Certificate to such address as may be specified in such request or form of transfer. For these purposes, a form of transfer or request for exchange received by the Registrar after the Record Date (as defined below) in respect of any payment due in respect of Registered Bonds shall be deemed not to be effectively received by the Registrar until the business day (as defined below) following the due date for such payment.
(d) Exchange at the Expense of Transferor Bondholder
Registration of Bonds on exchange or transfer will be effected at the expense of the transferor Bondholder by or on behalf of the Issuer, the Transfer Agent or the Registrar, and upon payment of (or the giving of such indemnity as the Transfer Agent or the Registrar may require in respect of) any tax or other governmental charges which may be imposed in relation to it.
(e) Closed Periods
No transfer of a Registered Bond may be registered, nor any exchange of a Bearer Bond for a Registered Bond may occur during the period of 15 days ending on the due date for any payment of principal, interest, Interest Amount (as defined below) or Redemption Amount (as defined below) on that Bond.
3 Status of Bonds and Financial Guarantee
(a) Status of Class A Bonds
This Condition 3(a) is applicable only in relation to Bonds which are specified as being a Sub-Class of Class A Bonds.
The Class A Bonds, Class A Coupons, Class A Talons and Class A Receipts (if any) are direct and unconditional obligations of the Issuer, are secured in the manner described in Condition 4 (Security, Priority and Relationship with Secured Creditors) and rank pari passu without any preference among themselves. However, the Class A Unwrapped Bonds will not have the benefit of any Financial Guarantee.
(b) Status of Class B Bonds
This Condition 3(b) is applicable only in relation to Bonds which are specified as being a Sub-Class of Class B Bonds.
The Class B Bonds, Class B Coupons, Class B Talons and Class B Receipts (if any) are direct and unconditional obligations of the Issuer, are secured in the manner described in Condition 4 (Security, Priority and Relationship with Secured Creditors), are subordinated to the Class A Bonds, Class A Coupons, Class A Receipts and Class A Talons (if any) and rank pari passu without any preference among themselves. However, the Class B Unwrapped Bonds will not have the benefit of any Financial Guarantee.
(c) Financial Guarantee Issued by Financial Guarantor
This Condition 3(c) is applicable only in relation to Bonds which are specified as being a Sub-Class of Wrapped Bonds.
178
Each Sub-Class of each Class of Wrapped Bonds will have the benefit of a Financial Guarantee issued by a Financial Guarantor, issued pursuant to a guarantee and reimbursement deed between, amongst others, the Issuer and a Financial Guarantor dated on or before the relevant Issue Date (as defined below) of such Bonds (each a “G&R Deed”). Under the relevant Financial Guarantee, the relevant Financial Guarantor unconditionally and irrevocably agrees to pay to the Bond Trustee all sums due and payable but unpaid by the Issuer in respect of scheduled interest and payment of principal (but excluding FG Excepted Amounts) on such Wrapped Bonds, all as more particularly described in the relevant Financial Guarantee.
The terms of the relevant Financial Guarantee provide that amounts of principal on any such Bonds which have become immediately due and payable (whether by virtue of acceleration, prepayment or otherwise) other than on the relevant Payment Date (as defined under the Financial Guarantee) will not be treated as Guaranteed Amounts (as defined in the Financial Guarantee) which are Due for Payment (as defined in the Financial Guarantee) under the Financial Guarantee unless the Financial Guarantor in its sole discretion elects so to do by notice in writing to the Bond Trustee. The Financial Guarantor may elect to accelerate payments due under the Financial Guarantee in full or partially. All payments made by the relevant Financial Guarantor under the relevant Financial Guarantee in respect of partial acceleration shall be applied (i) to pay the Interest (as defined in the relevant Financial Guarantee) accrued but unpaid on the Principal (as defined in the relevant Financial Guarantee) of such part of the accelerated payment and (ii) to reduce the Principal (as defined in the relevant Financial Guarantee) (or, in the case of Wrapped Bonds repayable in instalments, each principal repayment instalment on a pro rata basis with a corresponding reduction of each amount of the Interest (as determined in the Financial Guarantee)) outstanding under the relevant Sub-Classes of Wrapped Bonds. If no such election is made, the Financial Guarantor will continue to be liable to make payments in respect of the Bonds pursuant to the relevant Financial Guarantee on the dates on which such payments would have been required to be made if such amounts had not become immediately due and payable.
To the extent that the early redemption price of any Bonds exceeds the aggregate of the Principal Amount Outstanding of and any accrued interest outstanding on any such Bonds to be redeemed (each as adjusted for indexation in accordance with Condition 7(b) (Application of the Index Ratio), if applicable), payment of such early redemption price will not be guaranteed by the Financial Guarantor under the relevant Financial Guarantee.
(d) Status of Financial Guarantee
This Condition 3(d) is applicable only in relation to Bonds which are specified as being a Sub-Class of Wrapped Bonds.
The relevant Financial Guarantee provided by the Financial Guarantor in respect of the Bonds will constitute a direct, unsecured obligation of the Financial Guarantor which will rank at least pari passu with all other unsecured obligations of such Financial Guarantor, save for such obligations as may be preferred by provisions of law that are both mandatory and of general application.
(e) Security Trustee not responsible for monitoring compliance
Subject to certain exceptions, when granting any consent or waiver or exercising any power, trust, authority or discretion relating to or contained in the STID, the Finance Documents or any ancillary documents, the Security Trustee will act in accordance with its sole discretion (where granted such right) or as directed, requested or instructed by or subject to the agreement of the Majority Creditors or, where appropriate, the Super-Majority Creditors or, in particular cases, other specified parties and in accordance with the provisions of the STID.
The Security Trustee shall not be responsible for monitoring compliance by SWS with any of its obligations under the Finance Documents to which it is a party except by means of receipt from SWS
179
of certificates of compliance which SWS has covenanted to deliver to the Security Trustee pursuant to the provisions of the Common Terms Agreement and which will state among other things, that no Default is outstanding. The Security Trustee shall be entitled to rely on certificates absolutely unless it is instructed otherwise by the Majority Creditors in which case it will be bound to act on such instructions in accordance with the STID. The Security Trustee is not responsible for monitoring compliance by any of the parties with their respective obligations under the Finance Documents. The Security Trustee may call for and is at liberty to accept as sufficient evidence a certificate signed by any two Authorised Signatories of any Obligor or any other party to any Finance Document to the effect that any particular dealing, transaction, step or thing is in the opinion of the persons so certifying suitable or expedient or as to any other fact or matter upon which the Security Trustee may require to be satisfied. The Security Trustee is in no way bound to call for further evidence or be responsible for any loss that may be occasioned by acting on any such certificate although the same may contain some error or is not authentic. The Security Trustee is entitled to rely upon any certificate believed by it to be genuine and will not be liable for so acting.
All Bondholders shall (on providing sufficient evidence of identity) be entitled to view a copy of the Periodic Information (as defined in the Master Definitions Agreement) as and when available to the Security Trustee pursuant to the terms of the CTA and to view a copy of the unaudited interim accounts and audited annual accounts of SWS within 60 days of 30 September and 120 days of 31 March, respectively.
In addition, each Guarantor has covenanted to provide the Security Trustee with certain additional information (as set out in Schedule 5, Part 1 “Information Covenants” of the Common Terms Agreement). Such information may be published on a website designated by the relevant Guarantor and the Security Trustee. Any Bondholder who provides sufficient evidence of identity may obtain the current password to such website upon application to the Principal Paying Agent or the Registrar (as applicable).
In the event the relevant website cannot be accessed or is infected by an electronic virus or function software for a period of five consecutive days, all such information set out above which would otherwise be available will be delivered to the Security Trustee in paper form for onward delivery to the Bond Trustee and the Agents. Copies of such information will be available for inspection at the specified office of the Agents and the Bond Trustee.
4 Security, Priority and Relationship with Secured Creditors
(a) Guarantee and Security
Under the Security Agreement, each of SWS Holdings Limited (“SWSH”) and SWS Group Holdings Limited (“SWSGH”) guarantees the obligations of each other Obligor under the Finance Documents and SWS and the Issuer will guarantee the obligations of each other under the Finance Documents, in each case to the Security Trustee for itself and on behalf of the Secured Creditors (including, without limitation, the Bond Trustee for itself and on behalf of the Bondholders) and secures such obligations upon the whole of its property, undertaking, rights and assets, subject to certain specified exceptions and, in the case of SWS, to the terms of the Instrument of Appointment (as defined below) and any requirements thereunder or the Act (as defined below). There is no intention to create further security for the benefit of the holders of Bonds issued after the Initial Issue Date. All Bonds issued by the Issuer under the Programme and any additional creditor of the Issuer acceding to the STID will share in the security (the “Security”) constituted by the Security Documents.
In these Conditions:
the “Act” means the United Kingdom Water Industry Act 1991 (as amended);
180
“Instrument of Appointment” means the instrument of appointment, dated 1989 as amended under which the Secretary of State for the Environment appointed SWS as a water and sewerage undertaker under the Act for the areas described in the Instrument of Appointment, as modified or amended from time to time; and
“Obligors” means SWS, SWSGH, SWSH and the Issuer.
(b) Relationship among Bondholders and with other Secured Creditors.
The Bond Trust Deed contains provisions detailing the Bond Trustee’s obligations to consider discretions of the Bond Trustee (except where expressly provided or otherwise referred to in Condition 16 (Bond Trustee Protections).
The STID provides that the Security Trustee (except in relation to its Reserved Matters and Entrenched Rights (each as defined in the Master Definitions Agreement) and subject to certain exceptions) will act on instructions of the Majority Creditors (including the Bond Trustee as trustee for and representative of the holders of each Sub-Class of Wrapped Bonds (following the occurrence of an FG Event of Default (as defined in the Master Definitions Agreement) in respect of the Financial Guarantor of such Wrapped Bonds which is continuing) and the holders of Unwrapped Bonds) and, when so doing, the Security Trustee is not required to have regard to the interests of any Secured Creditor (including the Bond Trustee as trustee for and representative of the Bondholders or any individual Bondholder) in relation to the exercise of such rights and, consequently, has no liability to the Bondholders as a consequence of so acting.
(c) Enforceable Security
In the event of the Security becoming enforceable as provided in the STID, the Security Trustee shall, if instructed by the Majority Creditors, enforce its rights with respect to the Security, but without any liability as to the consequence of such action and without having regard to the effect thereof on, or being required to account for such action to, any particular Bondholder, provided that the Security Trustee shall not be obliged to take any action unless it is indemnified and/or secured to its satisfaction.
(d) Application After Enforcement
After enforcement of the Security, the Security Trustee shall (to the extent that such funds are available) use funds standing to the credit of the Accounts (other than the Excluded Accounts) (each as defined in the Master Definitions Agreement) to make payments in accordance with the Payment Priorities (as set out in the Common Terms Agreement).
(e) Bond Trustee and Security Trustee not liable for security
The Bond Trustee and the Security Trustee will not be liable for any failure to make the usual investigations or any investigations which might be made by a security holder in relation to the property which is the subject of the Security, and shall not be bound to enquire into or be liable for any defect or failure in the right or title of the relevant Obligor to the Security, whether such defect or failure was known to the Bond Trustee or the Security Trustee or might have been discovered upon examination or enquiry or whether capable of remedy or not, nor will it have any liability for the enforceability of the Security created under the Security Documents whether as a result of any failure, omission or defect in registering or filing or otherwise protecting or perfecting such Security. The Bond Trustee and the Security Trustee have no responsibility for the value of any such Security.
181
5 Issuer Covenants
So long as any of the Bonds remain outstanding, the Issuer has agreed to comply with the covenants as set out in Schedule 5 of the Common Terms Agreement.
The Bond Trustee shall be entitled to rely absolutely on a certificate of any director of the Issuer in relation to any matter relating to such covenants and to accept without liability any such certificate as sufficient evidence of the relevant fact or matter stated in such certificate.
6 Interest and other Calculations
(a) Interest Rate and Accrual
Each Bond (unless specified in the relevant Final Terms to be a Zero Coupon Bond) bears interest on its Principal Amount Outstanding as defined below (or as otherwise specified in the relevant Final Terms) from the Interest Commencement Date (as defined below) at the Interest Rate (as defined below), such interest being payable in arrear (unless otherwise specified in the relevant Final Terms) on each Interest Payment Date (as defined below). The amount of interest payable shall be determined in accordance with Condition 6(g).
Interest will cease to accrue on each Bond (or, in the case of the redemption of part only of a Bond, that part only of such Bond) on the due date for redemption unless, upon due presentation, payment of principal is improperly withheld or refused, in which event interest will continue to accrue (both before and after judgment) at the Interest Rate in the manner provided in this Condition 6 to the Relevant Date (as defined in Condition 6(i)(Definitions)).
In the case of interest on Class B Unwrapped Bonds only, if, on any Interest Payment Date, prior to the taking of Enforcement Action after the termination of a Standstill Period, there are insufficient funds available to the Issuer (after taking into account any amounts available to be drawn under any DSR Liquidity Facility or from the Debt Service Reserve Account) to pay such accrued interest, the Issuer’s liability to pay such accrued interest will be treated as not having fallen due and will be deferred until the earliest of: (i) the next following Interest Payment Date on which the Issuer has, in accordance with the cash management provisions of Schedule 12 of the Common Terms Agreement, sufficient funds available to pay such deferred amounts (including any interest accrued thereon);
(ii) the date on which the Class A Debt has been paid in full; and (iii) an Acceleration of Liabilities (other than a Permitted Hedge Termination or a Permitted Lease Termination) and in the case of a Permitted Share Pledge Acceleration only to the extent that there would be sufficient funds available in accordance with the Payment Priorities to pay such deferred interest (including any interest accrued thereon). Interest will accrue on such deferred interest at the rate otherwise payable on unpaid principal of such Class B Unwrapped Bonds.
If any Maximum Interest Rate or Minimum Interest Rate is specified in the relevant Final Terms, then the Interest Rate shall in no event be greater than the maximum or be less than the minimum so specified, as the case may be.
(b) Business Day Convention
If any date referred to in these Conditions or the relevant Final Terms is specified to be subject to adjustment in accordance with a Business Day convention and would otherwise fall on a day which is not a Business Day (as defined below), then if the Business Day Convention specified in the relevant Final Terms is:
(i) the “Following Business Day Convention”, such date shall be postponed to the next day which is a Business Day;
182
(ii) the “Modified Following Business Day Convention”, such date shall be postponed to the next day which is a Business Day unless it would thereby fall into the next calendar month, in which event such date shall be brought forward to the immediately preceding Business Day; or
(iii) the “Preceding Business Day Convention”, such date shall be brought forward to the immediately preceding Business Day.
(c) Floating Rate Bonds
This Condition 6(c) is applicable only if the relevant Final Terms specify the Bonds as Floating Rate Bonds.
If “Screen Rate Determination” is specified in the relevant Final Terms as the manner in which the Interest Rate(s) is/are to be determined, the Interest Rate applicable to the Bonds for each Interest Period will be determined by the Agent Bank (or the Calculation Agent, if applicable) on the following basis:
(i) if the Page (as defined below) displays a rate which is a composite quotation or customarily supplied by one entity, the Agent Bank (or the Calculation Agent, if applicable) will determine the Relevant Rate (as defined in Condition 6(i) (Definitions));
(ii) in any other case, the Agent Bank (or the Calculation Agent, if applicable) will determine the arithmetic mean of the Relevant Rates (as defined below) which appear on the Page as of the Relevant Time (as defined below) on the relevant Interest Determination Date;
(iii) if, in the case of (i) above, such rate does not appear on that Page or, in the case of (ii) above, fewer than two such rates appear on that Page or if, in either case, the Page is unavailable, the Agent Bank (or the Calculation Agent, if applicable) will:
(a) request the principal Relevant Financial Centre office of each of the Reference Banks (as defined in Condition 6(i) (Definitions)) to provide a quotation of the Relevant Rate at approximately the Relevant Time on the relevant Interest Determination Date to prime banks in the Relevant Financial Centre (as defined below) interbank market (or, if appropriate, money market) in an amount that is representative for a single transaction in that market at that time; and
(b) determine the arithmetic mean of such quotations; and
(iv) if fewer than two such quotations are provided as requested in Condition 6(c)(iii), the Agent Bank (or the Calculation Agent, if applicable) will determine the arithmetic mean of the rates (being the rates nearest to the Relevant Rate as determined by the Agent Bank (or the Calculation Agent, if applicable)) quoted by the Reference Banks at approximately 11.00 a.m. (local time in the Relevant Financial Centre of the Relevant Currency) on the first day of the relevant Interest Period (as defined in Condition 6(i) (Definitions)) for loans in the Relevant Currency to leading European banks for a period equal to the relevant Interest Period and in the Representative Amount (as defined in Condition 6(i) (Definitions)).
and the Interest Rate for such Interest Period shall be the sum of the Margin and the rate or (as the case may be) the arithmetic mean so determined. However, if the Agent Bank is unable to determine a rate or (as the case may be) an arithmetic mean in accordance with the above provisions in relation to any Interest Period, the Interest Rate applicable to the Bonds during such Interest Period will be the sum of the Margin and the rate or (as the case may be) the arithmetic mean last determined in relation to the Bonds in respect of a preceding Interest Period.
If “ISDA Determination” is specified in the relevant Final Terms as the manner in which the Interest Rate(s) is/are to be determined, the Interest Rate(s) applicable to the Bonds for each Interest Period
183
will be the sum of the Margin and the relevant ISDA Rate where “ISDA Rate” in relation to any Interest Period means a rate equal to the Floating Rate (as defined in the ISDA Definitions) that would be determined by the Agent Bank (or the Calculation Agent, if applicable) under an interest rate swap transaction if the Agent Bank (or the Calculation Agent, if applicable) were acting as calculation agent for that interest rate swap transaction under the terms of an agreement incorporating the ISDA Definitions and under which:
(i) the Floating Rate Option (as defined in the ISDA Definitions) is as specified in the relevant Final Terms;
(ii) the Designated Maturity (as defined in the ISDA Definitions) is the Specified Duration (as defined in Condition 6(i) (Definitions)); and
(iii) the relevant Reset Date (as defined in the ISDA Definitions) is either (1) if the relevant Floating Rate Option is based on LIBOR for a currency, the first day of that Interest Period, (2) if the relevant Floating Rate Option is based on EURIBOR, the first day of that Interest Period or (3) in any other case, as specified in the relevant Final Terms.
(d) Fixed Rate Bonds
This Condition 6(d) is applicable only if the relevant Final Terms specify the Bonds as Fixed Rate Bonds.
The Interest Rate applicable to the Bonds for each Interest Period will be the rate specified in the relevant Final Terms.
(e) Indexed Bonds
This Condition 6(e) is applicable only if the relevant Final Terms specify the Bonds as Indexed Bonds.
Payments of principal on, and the interest payable in respect of, the Bonds will be subject to adjustment for indexation and to the extent set out in Condition 7(b) (Application of the Index Ratio). The Interest Rate applicable to the Bonds for each Interest Period will be at the rate specified in the relevant Final Terms.
(f) Rounding
For the purposes of any calculations required pursuant to these Conditions (unless otherwise specified):
(i) all percentages resulting from such calculations will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point (with halves being rounded up);
(ii) all figures will be rounded to seven significant figures (with halves being rounded up); and
(iii) all currency amounts which fall due and payable will be rounded to the nearest unit of such currency (with halves being rounded up). For these purposes, “unit” means, with respect to any currency other than euro, the lowest amount of such currency which is available as legal tender in the country of such currency and, with respect to euro, means 0.01 euro.
(g) Calculations
The amount of interest payable per Calculation Amount (as defined in the relevant Final Terms) in respect of any Bond for each Interest Period shall be equal to the product of (1) the Interest Rate, (2) the Calculation Amount specified in the relevant Final Terms, and (3) the Day Count Fraction (as defined in Condition 6(i) (Definitions)) and, in the case of Indexed Bonds only, adjusted according to the indexation set out in Condition 7(b) (Application of the Index Ratio), unless an Interest Amount is specified in respect of such period in the relevant Final Terms, in which case the amount of interest
184
payable per Calculation Amount in respect of such Bond for such Interest Period will equal such Interest Amount.
(h) Determination and Publication of Interest Rates, Interest Amounts, Redemption Amounts and Instalment Amounts
As soon as practicable after the Relevant Time on each Interest Determination Date or such other time on such date as the Agent Bank (or the Calculation Agent, if applicable) may be required to calculate any Redemption Amount or the amount of an instalment of scheduled principal (an “Instalment Amount”), obtain any quote or make any determination or calculation, the Agent Bank (or the Calculation Agent, if applicable) will determine the Interest Rate and calculate the amount of interest payable (the “Interest Amounts”) in respect of each Specified Denomination of Bonds for the relevant Interest Period (including, for the avoidance of doubt any applicable Index Ratio to be calculated in accordance with Condition 7(b) (Application of the Index Ratio), calculate the Redemption Amount or Instalment Amount, obtain such quote or make such determination or calculation, as the case may be, and cause the Interest Rate and the Interest Amounts for each Interest Period and the relevant Interest Payment Date and, if required to be calculated, the Redemption Amount, Principal Amount Outstanding or any Instalment Amount to be notified to, in the case of Bearer Bonds, the Paying Agents or in the case of Registered Bonds, the Registrar, and, in each case, the Bond Trustee, the Issuer, the Bondholders and the London Stock Exchange and each other listing authority, stock exchange and/or quotation system by which the relevant Bonds have then been admitted to listing, trading and/or quotation) as soon as possible after its determination but in no event later than (i) (in case of notification to the London Stock Exchange and each other listing authority, stock exchange and/or quotation system by which the relevant Bonds have then been admitted to listing, trading and/or quotation) the commencement of the relevant Interest Period, if determined prior to such time, in the case of an Interest Rate and Interest Amount, or (ii) in all other cases, the fourth Business Day after such determination. The Interest Amounts and the Interest Payment Date so published may subsequently be amended (or appropriate alternative arrangements made by way of adjustment) without notice in the event of an extension or shortening of the Interest Period. Any such amendment will be promptly notified to each stock exchange or other relevant authority on which the relevant Sub- Class or Class of Bonds is for the time being listed or by which it has been admitted to listing and to the Bondholders in accordance with Condition 17 (Notices). If the Bonds become due and payable under Condition 11 (Events of Default), the accrued interest and the Interest Rate payable in respect of the Bonds shall nevertheless continue to be calculated as previously provided in accordance with this Condition but no publication of the Interest Rate or the Interest Amount so calculated need be made unless otherwise required by the Bond Trustee. The determination of each Interest Rate, Interest Amount, Redemption Amount and Instalment Amount, the obtaining of each quote and the making of each determination or calculation by the Agent Bank (or the Calculation Agent, if applicable) or, as the case may be, the Bond Trustee pursuant to this Condition 6 or Condition 7 (Indexation), shall (in the absence of manifest error) be final and binding upon all parties.
(i) Definitions
In these Conditions, unless the context otherwise requires, the following defined terms shall have the meanings set out below.
“Business Day” means:
(i) in relation to any sum payable in euro, a TARGET Settlement Day and a day on which commercial banks and foreign exchange markets settle payments generally in London and each (if any) additional city or cities specified in the relevant Final Terms; and
185
(ii) in relation to any sum payable in a currency other than euro, a day on which commercial banks and foreign exchange markets settle payments generally in London, in the principal financial centre of the Relevant Currency (which in the case of a payment in U.S. Dollars shall be New York) and in each (if any) additional city or cities specified in the relevant Final Terms;
“Day Count Fraction” means, in respect of the calculation of an amount of interest on any Bond for any period of time (whether or not constituting an Interest Period, the “Calculation Period”):
(i) if “Actual/Actual (ICMA)” is specified:
(a) if the Calculation Period is equal to or shorter than the Determination Period during which it falls, the number of days in the Calculation Period divided by the product of (x) the number of days in such Determination Period and (y) the number of Determination Periods normally ending in any year; and
(b) if the Calculation Period is longer than one Determination Period, the sum of;
(x) the number of days in such Calculation Period falling in the Determination Period in which it begins divided by the product of (1) the number of days in such Determination Period and (2) the number of Determination Periods normally ending in any year; and
(y) the number of days in such Calculation Period falling in the next Determination Period divided by the product of (1) the number of days in such Determination Period and (2) the number of Determination Periods normally ending in any year,
where:
“Determination Period” means the period from and including a Determination Date in any year but excluding the next Determination Date; and
“Determination Date” means the date specified as such hereon or, if none is so specified, the Interest Payment Date;
(ii) if “Actual/Actual” or “Actual/Actual – ISDA” is specified, the actual number of days in the Calculation Period divided by 365 (or, if any portion of that Calculation Period falls in a leap year, the sum of (1) the actual number of days in that portion of the Calculation Period falling in a leap year divided by 366, and (2) the actual number of days in that portion of the Calculation Period falling in a non-leap year divided by 365);
(iii) if “Actual/365 (Fixed)” is specified, the actual number of days in the Calculation Period divided by 365;
(iv) if “Actual/360” is specified, the actual number of days in the Calculation Period divided by 360;
(v) if “30/360”, “360/360” or “Bond Basis” is specified, the number of days in the Calculation Period divided by 360, calculated on a formula basis as follows:
Day Count Fraction = [360 x (Y2 -Y1)] + [30 x (M2 -M1)]+ (D2 -D1) 360
where:
(a) “Y1” is the year, expressed as a number, in which the first day of the Calculation Period falls;
(b) “Y2” is the year, expressed as a number, in which the day immediately following the last day included in the Calculation Period falls;
186
(c) “M1” is the calendar month, expressed as a number, in which the first day of the Calculation Period falls;
(d) “M2” is the calendar month, expressed as a number, in which the day immediately following the last day included in the Calculation Period falls;
(e) “D1” is the first calendar day, expressed as a number, of the Calculation Period, unless such number would be 31, in which case D1 will be 30; and
(f) “D2” is the calendar day, expressed as a number, immediately following the last day included in the Calculation Period, unless such number would be 31 and D1 is greater than 29, in which case D2 will be 30;
(vi) if “30E/360” or “Eurobond Basis” is specified, the number of days in the Calculation Period divided by 360, calculated on a formula basis as follows:
Day Count Fraction = [360 x (Y2 -Y1)] + [30 x (M2 -M1)]+ (D2 -D1) 360
where:
(a) “Y1” is the year, expressed as a number, in which the first day of the Calculation Period falls;
(b) “Y2” is the year, expressed as a number, in which the day immediately following the last day included in the Calculation Period falls;
(c) “M1” is the calendar month, expressed as a number, in which the first day of the Calculation Period falls;
(d) “M2” is the calendar month, expressed as a number, in which the day immediately following the last day included in the Calculation Period falls;
(e) “D1” is the first calendar day, expressed as a number, of the Calculation Period, unless such number would be 31, in which case D1 will be 30; and
(f) “D2” is the calendar day, expressed as a number, immediately following the last day included in the Calculation Period, unless such number would be 31, in which case D2 will be 30; and
(vii) if “30E/360 (ISDA)” is specified hereon, the number of days in the Calculation Period divided by 360, calculated on a formula basis as follows:
Day Count Fraction = [360 x (Y2 -Y1)] + [30 x (M2 -M1)]+ (D2 -D1) 360
where:
(a) “Y1” is the year, expressed as a number, in which the first day of the Calculation Period falls;
(b) “Y2” is the year, expressed as a number, in which the day immediately following the last day included in the Calculation Period falls;
(c) “M1” is the calendar month, expressed as a number, in which the first day of the Calculation Period falls;
(d) “M2” is the calendar month, expressed as a number, in which the day immediately following the last day included in the Calculation Period falls;
187
(e) “D1” is the first calendar day, expressed as a number, of the Calculation Period, unless (i) that day is the last day of February or (ii) such number would be 31, in which case D1 will be 30; and
(f) “D2” is the calendar day, expressed as a number, immediately following the last day included in the Calculation Period, unless (i) that day is the last day of February but not the Maturity Date or (ii) such number would be 31, in which case D2 will be 30;
“euro” means the lawful currency of the Participating Member States;
“Interest Commencement Date” means the Issue Date or such other date as may be specified in the relevant Final Terms;
“Interest Determination Date” means, with respect to an Interest Rate and an Interest Period, the date specified as such in the relevant Final Terms or, if none is so specified, the day falling two Business Days in London prior to the first day of such Interest Period (or if the specified currency is sterling the first day of such Interest Period) (as adjusted in accordance with any Business Day Convention (as defined below) specified in the relevant Final Terms);
“Interest Payment Date” means the date(s) specified as such in the relevant Final Terms;
“Interest Period” means the period beginning on (and including) the Interest Commencement Date and ending on (but excluding) the first Interest Payment Date and each successive period beginning on (and including) an Interest Payment Date and ending on (but excluding) the next succeeding Interest Payment Date;
“Interest Rate” means the rate of interest payable from time to time in respect of the Bonds and which is either specified as such in, or calculated in accordance with the provisions of, these Conditions and/or the relevant Final Terms;
“ISDA Definitions” means the 2006 ISDA Definitions (as amended and updated as at the date of issue of the first Tranche of Bonds of the relevant Sub-Class as published by the International Swaps and Derivatives Association, Inc.);
“Issue Date” means the date specified as such in the relevant Final Terms;
“Margin” means the rate per annum (expressed as a percentage) specified as such in the relevant Final Terms;
“Maturity Date” means the date specified in the relevant Final Terms as the final date on which the principal amount of the Bond is due and payable;
“Page” means such page, section, caption, column or other part of a particular information service (including the Reuters Money 3000 Service (“Reuters”) and the Telerate Monitor Screen (“Telerate”)) as may be specified in the relevant Final Terms, or such other page, section, caption, column or other part as may replace the same on that information service or on such other information service, in each case as may be nominated by the person or organisation providing or sponsoring the information appearing there for the purpose of displaying comparable rates or prices;
“Participating Member State” means a Member State of the European Communities which adopts the euro as its lawful currency in accordance with the Treaty establishing the European Communities (as amended), and “Participating Member States” means all of them;
“Principal Amount Outstanding” means, in relation to a Bond, Sub-Class or Class, the original face value thereof less any repayment of principal made to the Holder(s) thereof in respect of such Bond, Sub-Class or Class;
188
“Redemption Amount” means the amount provided under Condition 8(b) (Optional Redemption), unless otherwise specified in the relevant Final Terms;
“Reference Banks” means the institutions specified as such or, if none, four major banks selected by the Agent Bank (or the Calculation Agent, if applicable) in the interbank market (or, if appropriate, money market) which is most closely connected with the Relevant Rate as determined by the Agent Bank (or the Calculation Agent, if applicable), on behalf of the Issuer, in its sole and absolute discretion;
“Relevant Currency” means the currency specified as such or, if none is specified, the currency in which the Bonds are denominated;
“Relevant Date” means the earlier of (a) the date on which all amounts in respect of the Bonds have been paid, and (b) five days after the date on which all of the Principal Amount Outstanding (adjusted in the case of Indexed Bonds in accordance with Condition 7(b) (Application of Index Ratio)) has been received by the Principal Paying Agent or the Registrar, as the case may be. and notice to that effect has been given to the Bondholders in accordance with Condition 17 (Notices);
“Relevant Financial Centre” means, with respect to any Bond, the financial centre specified as such in the relevant Final Terms or, if none is so specified, the financial centre with which the Relevant Rate is most closely connected as determined by the Agent Bank (or the Calculation Agent, if applicable);
“Relevant Rate” means the offered rate for a Representative Amount of the Relevant Currency for a period (if applicable) equal to the Specified Duration (or such other rate as shall be specified in the relevant Final Terms);
“Relevant Time” means, with respect to any Interest Determination Date, the local time in the Relevant Financial Centre specified in the relevant Final Terms or, if none is specified, the local time in the Relevant Financial Centre at which it is customary to determine bid and offered rates in respect of deposits in the Relevant Currency in the interbank market in the Relevant Financial Centre;
“Representative Amount” means, with respect to any rate to be determined on an Interest Determination Date, the amount specified in the relevant Final Terms as such or, if none is specified, an amount that is representative for a single transaction in the relevant market at the time;
“Specified Duration” means, with respect to any Floating Rate (as defined in the ISDA Definitions) to be determined on an Interest Determination Date, the period or duration specified as such in the relevant Final Terms or, if none is specified, a period of time equal to the relative Interest Period;
“TARGET Settlement Day” means any day on which the TARGET system is open; and
“TARGET system” means the Trans-European Automated Real-Time Gross Settlement Express Transfer (known as TARGET2) system which was launched on 19 November 2007 or any successor thereto.
(j) Agent Bank, Calculation Agent and Reference Banks
The Issuer will procure that there shall at all times be an Agent Bank (and a Calculation Agent, if applicable) and four Reference Banks selected by the Issuer acting through the Agent Bank (or the Calculation Agent, if applicable) with offices in the Relevant Financial Centre if provision is made for them in these Conditions applicable to this Bond and for so long as it is outstanding. If any Reference Bank (acting through its relevant office) is unable or unwilling to continue to act as a Reference Bank, then the Issuer acting through the Agent Bank (or the Calculation Agent, if applicable) will select another Reference Bank with an office in the Relevant Financial Centre to act as such in its place. If the Agent Bank (or the Calculation Agent, if applicable) is unable or unwilling to act as such or if the Agent Bank (or the Calculation Agent, if applicable) fails duly to establish the Interest Rate for any
189
Interest Period or to calculate the Interest Amounts or any other requirements, the Issuer will appoint (with the prior written consent of the Bond Trustee) a successor to act as such in its place. The Agent Bank may not resign its duties without a successor having been appointed as aforesaid.
(k) Determination or Calculation by Bond Trustee
If the Agent Bank (or the Calculation Agent, if applicable) does not at any time for any reason determine any Interest Rate, Interest Amount, Redemption Amount, Instalment Amount or any other amount to be determined or calculated by it, the Bond Trustee shall (without liability for so doing) determine such Interest Rate. Interest Amount, Redemption Amount, Instalment Amount or other amount as aforesaid at such rate or in such amount as in its absolute discretion (having regard as it shall think fit to the procedures described above, but subject to the terms of the Bond Trust Deed) it shall deem fair and reasonable in all the circumstances or, subject as aforesaid, apply the foregoing provisions of this Condition, with any consequential amendments, to the extent that, in its sole opinion, it can do so and in all other respects it shall do so in such manner as it shall, in its absolute discretion, deem fair and reasonable in the circumstances, and each such determination or calculation shall be deemed to have been made by the Agent Bank (or the Calculation Agent, if applicable).
(l) Certificates to be final
All certificates, communications, opinions, determinations, calculations, quotations and decisions given, expressed, made or obtained for the purposes of the provisions of Condition 6 (Interest and Other Calculations) whether by the Principal Paying Agent, the Agent Bank (or the Calculation Agent, if applicable) or, if applicable, any calculation agent, shall (in the absence of wilful default, negligence, bad faith or manifest error) be binding on the Issuer, SWS, SWSH, SWSGH, the Agent Bank, the Bond Trustee, the Principal Paying Agent, the other Agents and all Bondholders, Receiptholders and Couponholders and (in the absence as aforesaid) no liability to the Issuer, SWS, SWSH, SWSGH, the Bond Trustee, the Bondholders, the Receiptholders or the Couponholders shall attach to the Principal Paying Agent, the Agent Bank or, if applicable, any calculation agent in connection with the exercise or non-exercise by it of its powers, duties and discretions pursuant to such provisions.
(m) Interest on Dual Currency Bonds
The rate or amount of interest payable in respect of Dual Currency Bonds shall be determined in the manner specified in the applicable Final Terms.
(n) Interest on Partly Paid Bonds
In the case of Partly Paid Bonds (other than Partly Paid Bonds which are Zero Coupon Bonds), interest will accrue as aforesaid on the paid-up nominal amount of such Bonds and otherwise as specified in the applicable Final Terms.
7 Indexation
This Condition 7 is applicable only if the relevant Final Terms specify the Bonds as Indexed Bonds.
(a) Definitions
“affiliate” means in relation to any person, any entity controlled, directly or indirectly, by that person, any entity that controls directly or indirectly, that person or any entity, directly or indirectly under common control with that person and, for this purpose, “control” means control as defined in the Companies Act 1985;
“Base Index Figure” means (subject to Condition 7(c)(i) (Change in base)) the base index figure as specified in the relevant Final Terms;
190
“Index” or “Index Figure” means, subject as provided in Condition 7(c)(i) (Change in base), the UK Retail Price Index (RPI) (for all items) published by the Central Statistical Office (January 1987 = 100) or any comparable index which may replace the UK Retail Price Index for the purpose of calculating the amount payable on repayment of the Reference Gilt. Any reference to the Index Figure applicable to a particular month shall, subject as provided in Condition 7(c) (Changes in Circumstances Affecting the Index) and (e) (Cessation of or Fundamental Changes to the Index), be construed as a reference to the Index Figure published in the seventh month prior to that particular month and relating to the month before that of publication. If the Index is replaced, the Issuer will describe the replacement Index in a supplementary prospectus;
“Index Ratio” applicable to any month means the Index Figure applicable to such month divided by the Base Index Figure;
“Limited Index Ratio” means (a) in respect of any month prior to the relevant Issue Date, the Index Ratio for that month; (b) in respect of any Limited Indexation Month after the relevant Issue Date, the product of the Limited Indexation Factor for that month and the Limited Index Ratio as previously calculated in respect of the month twelve months prior thereto; and (c) in respect of any other month, the Limited Index Ratio as previously calculated in respect of the most recent Limited Indexation Month;
“Limited Indexation Factor” means, in respect of a Limited Indexation Month, the ratio of the Index Figure applicable to that month divided by the Index Figure applicable to the month twelve months prior thereto, provided that (a) if such ratio is greater than the Maximum Indexation Factor specified in the relevant Final Terms, it shall be deemed to be equal to such Maximum Indexation Factor and (b) if such ratio is less than the Minimum Indexation Factor specified in the relevant Final Terms, it shall be deemed to be equal to such Minimum Indexation Factor;
“Limited Indexation Month” means any month specified in the relevant Final Terms for which a Limited Indexation Factor is to be calculated;
“Limited Indexed Bonds” means Indexed Bonds to which a Maximum Indexation Factor and/or a Minimum Indexation Factor (as specified in the relevant Final Terms) applies; and
“Reference Gilt” means the Treasury Stock specified as such in the relevant Final Terms for so long as such stock is in issue, and thereafter such issue of index-linked Treasury Stock determined to be appropriate by a gilt-edged market maker or other adviser selected by the Issuer and approved by the Bond Trustee (an “Indexation Adviser”).
(b) Application of the Index Ratio
Each payment of interest and principal in respect of the Bonds shall be the amount provided in, or determined in accordance with, these Conditions, multiplied by the Index Ratio or Limited Index Ratio in the case of Limited Indexed Bonds applicable to the month in which such payment falls to be made and rounded in accordance with Condition 6(f) (Rounding).
(c) Changes in Circumstances Affecting the Index
(i) Change in base: If at any time and from time to time the Index is changed by the substitution of a new base therefor, then with effect from the calendar month from and including that in which such substitution takes effect (1) the definition of “Index” and “Index Figure” in Condition 7(a) (Definitions) shall be deemed to refer to the new date or month in substitution for January 1987 (or, as the case may be, to such other date or month as may have been substituted therefor), and (2) the new Base Index Figure shall be the product of the existing Base Index Figure (being at the Initial Issue Date 178.2) and the Index Figure immediately following such substitution, divided by the Index Figure immediately prior to such substitution.
191
(ii) Delay in publication of Index: If the Index Figure which is normally published in the seventh month and which relates to the eighth month (the “relevant month”) before the month in which a payment is due to be made is not published on or before the fourteenth business day before the date on which such payment is due (the “date for payment”), the Index Figure applicable to the month in which the date for payment falls shall be (1) such substitute index figure (if any) as the Bond Trustee considers to have been published by the Bank of England for the purposes of indexation of payments on the Reference Gilt or, failing such publication, on any one or more issues of index-linked Treasury Stock selected by an Indexation Adviser (and approved by the Bond Trustee) or (2) if no such determination is made by such Indexation Adviser within seven days, the Index Figure last published (or, if later, the substitute index figure last determined pursuant to Condition 7(c)(i) (Change in base)) before the date for payment.
(d) Application of Changes
Where the provisions of Condition 7(c)(ii) (Delay in publication of Index) apply, the determination of the Indexation Adviser as to the Index Figure applicable to the month in which the date for payment falls shall be conclusive and binding. If, an Index Figure having been applied pursuant to Condition 7(c)(ii)(2), the Index Figure relating to the relevant month is subsequently published while a Bond is still outstanding, then:
(i) in relation to a payment of principal or interest in respect of such Bond other than upon final redemption of such Bond, the principal or interest (as the case may be) next payable after the date of such subsequent publication shall be increased or reduced by an amount equal to (respectively) the shortfall or excess of the amount of the relevant payment made on the basis of the Index Figure applicable by virtue of Condition 7(c)(ii)(2), below or above the amount of the relevant payment that would have been due if the Index Figure subsequently published had been published on or before the fourteenth business day before the date for payment; and
(ii) in relation to a payment of principal or interest upon final redemption, no subsequent adjustment to amounts paid will be made.
(e) Cessation of or Fundamental Changes to the Index
(i) If (1) the Bond Trustee has been notified by the Agent Bank (or the Calculation Agent, if applicable) that the Index has ceased to be published or (2) any change is made to the coverage or the basic calculation of the Index which constitutes a fundamental change which would, in the opinion of the Bond Trustee acting solely on the advice of an Indexation Adviser, be materially prejudicial to the interests of the Bondholders, the Bond Trustee will give written notice of such occurrence to the Issuer, and the Issuer and the Bond Trustee together shall seek to agree for the purpose of the Bonds one or more adjustments to the Index or a substitute index (with or without adjustments) with the intention that the same should leave the Issuer and the Bondholders in no better and no worse position than they would have been had the Index not ceased to be published or the relevant fundamental change not been made.
(ii) If the Issuer and the Bond Trustee fail to reach agreement as mentioned above within 20 business days following the giving of notice as mentioned in paragraph (i), a bank or other person in London shall be appointed by the Issuer and the Bond Trustee or, failing agreement on and the making of such appointment within 20 business days following the expiry of the 20 day period referred to above, by the Bond Trustee (in each case, such bank or other person so appointed being referred to as the “Expert”), to determine for the purpose of the Bonds one or more adjustments to the Index or a substitute index (with or without adjustments) with the intention that the same should leave the Issuer and the Bondholders in no better and no worse position than they would have been had the Index not ceased to be published or the relevant
192
fundamental change not been made. Any Expert so appointed shall act as an expert and not as an arbitrator and all fees, costs and expenses of the Expert and of any Indexation Adviser and of any of the Issuer and the Bond Trustee in connection with such appointment shall be borne by the Issuer.
(iii) The Index shall be adjusted or replaced by a substitute index as agreed by the Issuer and the Bond Trustee or as determined by the Expert pursuant to the foregoing paragraphs, as the case may be, and references in these Conditions to the Index and to any Index Figure shall be deemed amended in such manner as the Bond Trustee and the Issuer agree are appropriate to give effect to such adjustment or replacement. Such amendments shall be effective from the date of such notification and binding upon the Issuer, the Financial Guarantor(s), the other Secured Creditors, the Bond Trustee and the Bondholders, and the Issuer shall give notice to the Bondholders in accordance with Condition 17 (Notices) of such amendments as promptly as practicable following such notification.
8 Redemption, Purchase and Cancellation
(a) Partial and Final Redemption
Unless previously redeemed, or purchased and cancelled as provided below, or unless such Bond is stated in the relevant Final Terms as having no fixed maturity date, each Bond will be redeemed at its Principal Amount Outstanding (in the case of Indexed Bonds as adjusted in accordance with Condition 7(b) (Application of the Index Ratio)), on the date or dates (or, in the case of Floating Rate Bonds, on the Interest Payment Date(s)) specified in the relevant Final Terms plus accrued but unpaid interest (other than in the case of Zero Coupon Bonds) and, in the case of Indexed Bonds as adjusted in accordance with Condition 7(b) (Application of the Index Ratio).
In the case of principal on Class B Unwrapped Bonds only, if on any date, prior to the taking of Enforcement Action after the termination of a Standstill Period, on which such Bond is to be redeemed (in whole of in part) there are insufficient funds available to the Issuer to pay such principal, the Issuer’s liability to pay such principal will be treated as not having fallen due and will be deferred until the earliest of (i) the next following Interest Payment Date on which the Issuer has, in accordance with the cash management provisions of Schedule 12 of the Common Terms Agreement, sufficient funds to pay such deferred amounts (including any interest accrued thereon); (ii) the date on which all Class A Debt has been paid in full and (iii) an Acceleration of Liabilities (other than a Permitted Hedge Termination or a Permitted Lease Termination) and in the case of a Permitted Share Pledge Acceleration only to the extent that there would be sufficient funds available in accordance with the Payment Priorities to pay such deferred principal (including any accrued interest thereon). Interest will accrue on such deferred principal at the rate otherwise payable on unpaid principal of such Class B Unwrapped Bonds.
(b) Optional Redemption
Subject as provided below, upon giving not more than 60 nor less than 30 days’ notice to the Bond Trustee, the Security Trustee, the Majority Creditors and the Bondholders, the Issuer may (prior to the Maturity Date) redeem any Sub-Class of the Bonds in whole or in part (but on a pro rata basis only) on any Interest Payment Date at their Redemption Amount, provided that Floating Rate Bonds may not be redeemed before the date specified in the relevant Final Terms, as follows:
(i) In respect of Fixed Rate Bonds, the Redemption Amount will, unless otherwise specified in the relevant Final Terms, be an amount equal to the higher of (i) their Principal Amount Outstanding and (ii) the price determined to be appropriate by a financial adviser in London (selected by the Issuer and approved by the Bond Trustee) as being the price at which the Gross
193
Redemption Yield (as defined below) on such Bonds on the Reference Date (as defined below) is equal to the Gross Redemption Yield at 3:00 p.m. (London time) on the Reference Date on the Reference Gilt (as defined below) while that stock is in issue, and thereafter such UK government stock as the Issuer may, with the advice of three persons operating in the gilt-edged market (selected by the Issuer and approved by the Bond Trustee) determine to be appropriate, plus accrued but unpaid interest on the Principal Amount Outstanding.
For the purposes of this Condition 8(b)(i), “Gross Redemption Yield” means a yield expressed as a percentage and calculated on a basis consistent with the basis indicated by the United Kingdom Debt Management Office publication “Formulae for Calculating Gilt Prices from Yields” published on 8 June 1998 with effect from 1 November 1998 and updated on 15 January 2002 page 5 or any replacement therefor; “Reference Date” means the date which is two Business Days prior to the despatch of the notice of redemption under this Condition 8(b)(i); and “Reference Gilt” means the Treasury Stock specified in the relevant Final Terms.
(ii) In respect of Floating Rate Bonds, the Redemption Amount will, unless otherwise specified in the relevant Final Terms, be the Principal Amount Outstanding plus any premium for early redemption in certain years (as specified in the relevant Final Terms) plus any accrued but unpaid interest on the Principal Amount Outstanding.
(iii) In respect of Indexed Bonds, the Redemption Amount will (unless otherwise specified in the relevant Final Terms) be the higher of (i) the Principal Amount Outstanding and (ii) the price determined to be appropriate (without any additional indexation beyond the implicit indexation in such determined price) by a financial adviser in London (selected by the Issuer and approved by the Bond Trustee as being the price at which the Gross Real Redemption Yield (as defined below) on the Bonds on the Reference Date (as defined below) is equal to the Gross Real Redemption Yield at 3:00 p.m. (London time) on the Reference Date on the Reference Gilt while that stock is in issue, and thereafter such UK government stock as the Issuer may, with the advice of three persons operating in the gilt-edged market, (selected by the Issuer and approved by the Bond Trustee), determine to be appropriate, plus accrued but unpaid interest (as adjusted in accordance with Condition 7(b) (Application of the Index Ratio)) on the Principal Amount Outstanding.
For the purposes of this Condition 8(b)(iii), “Gross Real Redemption Yield” means a yield expressed as a percentage and calculated on a basis consistent with the basis indicated by the United Kingdom Debt Management Office publication “Formulae for Calculating Gilt Prices from Yields” published on 8 June 1998 with effect from 1 November 1998 and updated on 15 January 2002, page 4 or any replacement therefor, “Reference Date” means the date which is two Business Days prior to the despatch of the notice of redemption under this Condition 8(b)(iii); and “Reference Gilt” means the Treasury Stock specified in the relevant Final Terms.
In any such case, prior to giving any such notice, the Issuer must certify (as further specified in the Finance Documents) to the Bond Trustee that it will have the funds, not subject to any interest (other than under the Security) of any other person, required to redeem the Bonds as aforesaid.
(c) Redemption for Index Event, Taxation or Other Reasons
Redemption for Index Events: Upon the occurrence of any Index Event (as defined below), the Issuer may, upon giving not more than 60 nor less than 30 days’ notice to the Bond Trustee, the Security Trustee, the Majority Creditors and the holders of the Indexed Bonds in accordance with Condition 17 (Notices), redeem all (but not some only) of the Indexed Bonds of all Sub-Classes on any Interest Payment Date at the Principal Amount Outstanding (adjusted in accordance with Condition 7(b) (Application of Index Ratio)) plus accrued but unpaid interest. No single Sub-Class of Indexed Bonds may be redeemed in these circumstances unless all the other Classes and Sub-Classes of Indexed
194
Bonds are also redeemed at the same time. Before giving any such notice, the Issuer shall provide to the Bond Trustee, the Security Trustee, the Majority Creditors and the relevant Financial Guarantor(s) a certificate signed by an authorised signatory (a) stating that the Issuer is entitled to effect such redemption and setting forth a statement of facts showing that the conditions precedent to the right of the Issuer so to redeem have occurred and (b) confirming that the Issuer will have sufficient funds on such Interest Payment Date to effect such redemption.
“Index Event” means (i) if the Index Figure for three consecutive months falls to be determined on the basis of an Index Figure previously published as provided in Condition 7(c)(ii) (Delay in publication of Index) and the Bond Trustee has been notified by the Principal Paying Agent that publication of the Index has ceased or (ii) notice is published by Her Majesty’s Treasury, or on its behalf, following a change in relation to the Index, offering a right of redemption to the holders of the Reference Gilt, and (in either case) no amendment or substitution of the Index has been advised by the Indexation Adviser to the Issuer and such circumstances are continuing.
Redemption for Taxation Reasons: In addition, if at any time the Issuer satisfies the Bond Trustee that the Issuer would, on the next Interest Payment Date, become obliged to deduct or withhold from any payment of interest or principal in respect of the Bonds (other than in respect of default interest), any amount for or on account of any present or future taxes, duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld or assessed by the United Kingdom or the Cayman Islands or any political subdivision thereof, or any other authority thereof or any change in the application or official interpretation of such laws or regulations, then the Issuer may, in order to avoid the relevant deductions or withholding, use its reasonable endeavours to arrange the substitutions of a company incorporated under another jurisdiction approved by the Bond Trustee as principal debtor under the Bonds and as lender under the Issuer/SWS Loan Agreements and as obligor under the Finance Documents upon satisfying the conditions for substitution of the Issuer as set out in the STID (and referred to in Condition 15 (Meetings of Bondholders, Modification, Waiver and Substitution)). If the Issuer is unable to arrange a substitution as described above having used reasonable endeavours to do so and, as a result, the relevant deduction or withholding is continuing then the Issuer may, upon giving not more than 60 nor less than 30 days’ notice to the Bond Trustee, the Security Trustee, the Majority Creditors and the Bondholders in accordance with Condition 17 (Notices), redeem all (but not some only) of the Bonds on any Interest Payment Date at their Principal Amount Outstanding plus accrued but unpaid interest thereon (each adjusted, in the case of Indexed Bonds, in accordance with Condition 7(b) (Application of the Index Ratio)). Before giving any such notice of redemption, the Issuer shall provide to the Bond Trustee, the Security Trustee and the Majority Creditors and the relevant Financial Guarantors a certificate signed by an authorised signatory (a) stating that the Issuer is entitled to effect such redemption and setting forth a statement of facts showing that the conditions precedent to the right of the Issuer so to redeem have occurred and (b) confirming that the Issuer will have sufficient funds on such Interest Payment Date to discharge all its liabilities in respect of the Bonds and any amounts under the Security Agreement to be paid in priority to, or pari passu with, the Bonds under the Payment Priorities.
(d) Redemption on Prepayment of Issuer/SWS Loan Agreements
If SWS gives notice to the Issuer under an Issuer/SWS Loan Agreement that it intends to prepay all or part of any advance made under such Issuer/SWS Loan Agreement and such advance was funded by the Issuer from the proceeds of the issue of a Sub-Class of Bonds, the Issuer shall, upon giving not more than 60 nor less than 30 days’ notice to the Bond Trustee, the Security Trustee, the Majority Creditors, the relevant Financial Guarantors and the Bondholders in accordance with Condition 17 (Notices) (where such advance is being prepaid in whole), redeem all of the Bonds of that Sub-Class or (where part only of such advance is being prepaid) the proportion of the relevant Sub-Class of Bonds which the proposed prepayment amount bears to the amount of the relevant advance. In the case of a
195
voluntary prepayment, the relevant Bonds will be redeemed at their Redemption Amount determined in accordance with Condition 8(b) (Optional Redemption) except that, in the case of Fixed Rate Bonds and Indexed Bonds, for the purposes of this Condition 8(d), “Reference Date” means the date two Business Days prior to the despatch of the notice of redemption given under this Condition 8(d), plus accrued but unpaid interest and, in the case of any other prepayment, the relevant Bonds will be redeemed at their Principal Amount Outstanding plus accrued but unpaid interest.
(e) Early redemption of Zero Coupon Bonds
Unless otherwise specified in the relevant Final Terms, the Redemption Amount payable on redemption of a Zero Coupon Bond at any time before the Maturity Date shall be an amount equal to the sum of:
(i) the Reference Price; and
(ii) the product of the Accrual Yield (compounded annually) being applied to the Reference Price from (and including) the Issue Date to (but excluding) the date fixed for redemption or (as the case may be) the date upon which the Bond becomes due and payable.
Where such calculation is to be made for a period which is not a whole number of years, the calculation in respect of the period of less than a full year shall be made on the basis of such Day Count Fraction as may be specified in the Final Terms for the purposes of this Condition 8(e) or, if none is so specified, a Day Count Fraction of 30/360.
In these Conditions, “Accrual Yield” and “Reference Price” and “Zero Coupon Bond” have the meanings given to them in the relevant Final Terms.
(f) Purchase of Bonds
The Issuer may, provided that no Event of Default has occurred and is continuing, purchase Bonds (provided that all unmatured Receipts and Coupons and unexchanged Talons (if any) appertaining thereto are attached or surrendered therewith) in the open market or otherwise at any price. Any purchase by tender shall be made available to all Bondholders alike.
If not all the Bonds which are in registered form are to be purchased, upon surrender of the existing Individual Bond Certificate, the Registrar shall forthwith upon the written request of the Bondholder concerned issue a new Individual Bond Certificate in respect of the Bonds which are not to be purchased and despatch such Individual Bond Certificate to the Bondholder (at the risk of the Bondholder and to such address as the Bondholder may specify in such request).
While the Bonds are represented by a Global Bond or Global Bond Certificate (as defined below), the relevant Global Bond or Global Bond Certificate will be endorsed to reflect the Principal Amount Outstanding of Bonds to be so redeemed or purchased.
(g) Redemption by Instalments
Unless previously redeemed, purchased and cancelled as provided in this Condition 8, each Bond which provides for Instalment Dates (as specified in the relevant Final Terms) and Instalment Amounts (as specified in the relevant Final Terms) will be partially redeemed on each Instalment Date at the Instalment Amount.
(h) Cancellation
In respect of all Bonds purchased by or on behalf of the Issuer, the Bearer Bonds or the Registered Bonds shall be surrendered to or to the order of the Principal Paying Agent or the Registrar, as the case may be, for cancellation and, if so surrendered, will, together with all Bonds redeemed by the Issuer, be cancelled forthwith (together with, in the case of Bearer Bonds, all unmatured Receipts and
196
Coupons and unexchanged Talons attached thereto or surrendered therewith). Any Bonds so surrendered for cancellation may not be reissued or resold and the obligations of the Issuer in respect of any such Bonds shall be discharged.
(i) Instalments
Instalment Bonds will be redeemed in the Instalment Amounts and on the Instalment Dates. In the case of early redemption, the Redemption Amount will be determined pursuant to paragraph (b) above.
(j) Partly Paid Bonds
Partly Paid Bonds will be redeemed, whether at maturity, early redemption or otherwise, in accordance with the provisions of this Condition and the applicable Final Terms.
9 Payments
(a) Bearer Bonds
Payments to the Bondholders of principal (or, as the case may be. Redemption Amounts or other amounts payable on redemption) and interest (or, as the case may be, Interest Amounts) in respect of Bearer Bonds will, subject as mentioned below, be made against presentation and surrender of the relevant Receipts (in the case of payment of Instalment Amounts other than on the due date for final redemption and provided that the Receipt is presented for payment together with its relative Bond), Bonds (in the case of all other payments of principal and, in the case of interest, as specified in Condition 9(f) (Unmatured Coupons and Receipts and Unexchanged Talons)) or Coupons (in the case of interest, save as specified in Condition 9(f) (Unmatured Coupons and Receipts and Unexchanged Talons)), as the case may be, at the specified office of any Paying Agent outside the United States of America by transfer to an account denominated in the currency in which such payment is due with, or (in the case of Bonds in definitive form only) a cheque payable in that currency drawn on, a bank in (i) the principal financial centre of that currency provided that such currency is not euro, or (ii) the principal financial centre of any Participating Member State if that currency is euro.
(b) Registered Bonds
Payments of principal (or, as the case may be, Redemption Amounts) in respect of Registered Bonds will be made to the holder (or the first named of joint holders) of such Bond against presentation and surrender of the relevant Registered Bond at the specified office of the Registrar and in the manner provided in Condition 9(a) (Bearer Bonds).
Payments of instalments in respect of Registered Bonds will be made to the holder (or the first named of joint holders) of such Bond against presentation of the relevant Registered Bond at the specified office of the Registrar in the manner provided in Condition 9(a) (Bearer Bonds) above and annotation of such payment on the Register and the relevant Bond Certificate.
Interest (or, as the case may be, Interest Amounts) on Registered Bonds payable on any Interest Payment Date will be paid to the holder (or the first named if joint holders) on the fifteenth day before the due date for payment thereof (the “Record Date”). Payment of interest or Interest Amounts on each Registered Bond will be made in the currency in which such payment is due by cheque drawn on a bank in (a) the principal financial centre of the country of the currency concerned, provided that such currency is not euro, or (b) the principal financial centre of any Participating Member State if that currency is euro and mailed to the holder (or to the first named of joint holders) of such Bond at its address appearing in the Register. Upon application by the Bondholder to the specified office of the Registrar before the relevant Record Date, such payment of interest may be made by transfer to an account in the relevant currency maintained by the payee with a bank in (a) the principal financial
197
centre of the country of that currency provided that such currency is not euro, or (b) the principal financial centre of any Participating Member State if that currency is euro.
A record of each payment so made will be endorsed on the schedule to the Global Bond or the Global Bond Certificate by or on behalf of the Principal Paying Agent or the Registrar, as the case may be, which endorsement shall be prima facie evidence that such payment has been made.
(c) Payments in the United States of America
Notwithstanding the foregoing, if any Bearer Bonds are denominated in U.S. dollars, payments in respect thereof may be made at the specified office of any Paying Agent in New York City in the same manner as aforesaid if:
(i) the Issuer shall have appointed Paying Agents with specified offices outside the United States of America with the reasonable expectation that such Paying Agents would be able to make payment of the amounts on the Bonds in the manner provided above when due;
(ii) payment in full of such amounts at all such offices is illegal or effectively precluded by exchange controls or other similar restrictions on payment or receipt of such amounts; and
(iii) such payment is then permitted by the law of the United States of America, without involving, in the opinion of the Issuer, adverse tax consequences to the Issuer.
(d) Payments subject to fiscal laws; payments on Global Bonds and Registered Bonds
All payments are subject in all cases to any applicable fiscal or other laws, regulations and directives, but without prejudice to the provisions of this Condition 9. No commission or expenses shall be charged to the Bondholders, Couponholders or Receiptholders (if any) in respect of such payments.
The holder of a Global Bond or Global Bond Certificate shall be the only person entitled to receive payments of principal (or Redemption Amounts) and interest (or Interest Amounts) on the Global Bond or Global Bond Certificate (as the case may be) and the Issuer will be discharged by payment to, or to the order of, the holder of such Global Bond or Global Bond Certificate in respect of each amount paid.
(e) Appointment of the Agents
The Paying Agents, the Agent Bank, the Transfer Agents and the Registrar (the “Agents”) appointed by the Issuer (and their respective specified offices) are listed in the Agency Agreement. Any Calculation Agent will be listed in the relevant Final Terms and will be appointed pursuant to a Calculation Agency Agreement. The Agents act solely as agents of the Issuer and do not assume any obligation or relationship of agency or trust for or with any holder. The Issuer reserves the right, with the prior written consent of the Bond Trustee at any time to vary or terminate the appointment of any Agent, and to appoint additional or other Agents, provided that the Issuer will at all times maintain (i) a Principal Paying Agent (in the case of Bearer Bonds), (ii) a Registrar (in the case of Registered Bonds), (iii) an Agent Bank or Calculation Agent (as specified in the relevant Final Terms) (in the case of Floating Rate Bonds or Indexed Bonds), (iv) a Paying Agent with a specified office in a European Union member state that will not be obliged to withhold or deduct tax pursuant to European Council Directive 2003/48/EC or any other Directive implementing the conclusions of the ECOFIN Council meeting of 26-27 November 2000; and (v) if and for so long as the Bonds are admitted to listing, trading and/or quotation by any listing authority, stock exchange and/or quotation system which requires the appointment of a Paying Agent, Transfer Agent or Registrar in any particular place, a Paying Agent, Transfer Agent and/or Registrar, as applicable, having its specified office in the place required by such listing authority, stock exchange and/or quotation system, which, while any Bonds are admitted to the Official List of the UK Listing Authority and/or admitted to trading on the London
198
Stock Exchange’s Regulated Market or the London Stock Exchange’s Professional Securities Market shall be in London. Notice of any such variation, termination or appointment will be given in accordance with Condition 17 (Notices).
(f) Unmatured Coupons and Receipts and Unexchanged Talons
(i) Subject to the provisions of the relevant Final Terms, upon the due date for redemption of any Bond which is a Bearer Bond (other than a Fixed Rate Bond, unless it has all unmatured Coupons attached), unmatured Coupons and Receipts relating to such Bond (whether or not attached) shall become void and no payment shall be made in respect of them.
(ii) Upon the date for redemption of any Bond, any unmatured Talon relating to such Bond (whether or not attached) shall become void and no Coupon shall be delivered in respect of such Talon.
(iii) Upon the due date for redemption of any Bond which is redeemable in instalments, all Receipts relating to such Bond having an Instalment Date falling on or after such due date (whether or not attached) shall become void and no payment shall be made in respect of them.
(iv) Where any Bond, which is a Bearer Bond and is a Fixed Rate Bond, is presented for redemption without all unmatured Coupons and any unexchanged Talon relating to it, a sum equal to the aggregate amount of the missing unmatured Coupons will be deducted from the amount of principal due for payment and, redemption shall be made only against the provision of such indemnity as the Issuer may require.
(v) If the due date for redemption of any Bond is not an Interest Payment Date, interest accrued from the preceding Interest Payment Date or the Interest Commencement Date, as the case may be, or the Interest Amount payable on such date for redemption shall only be payable against presentation (and surrender if appropriate) of the relevant Bond and Coupon.
(g) Non-Business Days
Subject as provided in the relevant Final Terms, if any date for payment in respect of any Bond, Receipt or Coupon is not a business day, the holder shall not be entitled to payment until the next following business day nor to any interest or other sum in respect of such postponed payment. In this paragraph, “business day” means a day (other than a Saturday or a Sunday) on which banks are open for presentation and payment of debt securities and for dealings in foreign currency in London and in the relevant place of presentation and in the cities referred to in the definition of Business Days and (in the case of a payment in a currency other than euro), where payment is to be made by transfer to an account maintained with a bank in the relevant currency, on which dealings may be carried on in the relevant currency in the principal financial centre of the country of such currency and, in relation to any sum payable in euro, a day on which the TARGET system is open.
(h) Talons
On or after the Interest Payment Date for the final Coupon forming part of a coupon sheet issued in respect of any Bond, the Talon forming part of such coupon sheet may be surrendered at the specified office of any Paying Agent in exchange for a further coupon sheet (and if necessary another Talon for a further coupon sheet) (but excluding any Coupons which may have become void pursuant to Condition 13 (Prescription)).
10 Taxation
All payments in respect of the Bonds, Receipts or Coupons will be made (whether by the Issuer, any Paying Agent, the Registrar, the Bond Trustee, the Security Trustee or, in respect of Wrapped Bonds, the Financial
199
Guarantors) without withholding or deduction for, or on account of, any present or future taxes, duties or charges of whatsoever nature unless the Issuer, the Guarantors, any Paying Agent or the Registrar or, where applicable, the Bond Trustee, the Security Trustee or the Financial Guarantor is required by applicable law to make any payment in respect of the Bonds, Receipts or Coupons subject to any withholding or deduction for, or on account of, any present or future taxes, duties or charges of whatsoever nature. In that event, the Issuer, the Guarantors, such Paying Agent, the Registrar, the Bond Trustee, the Security Trustee or the Financial Guarantor, as the case may be, shall make such payment after such withholding or deduction has been made and shall account to the relevant authorities for the amount so required to be withheld or deducted. None of the Issuer, the Guarantors, any Paying Agent, the Registrar, the Bond Trustee, the Security Trustee or the Financial Guarantor will be obliged to make any additional payments to the Bondholders, Receiptholders or the Couponholders in respect of such withholding or deduction. The Issuer, the Guarantors, any Paying Agent, the Registrar, the Bond Trustee, the Security Trustee or the Financial Guarantor may require holders to provide such certifications and other documents as required by applicable law in order to qualify for exemptions from applicable tax laws.
If the Issuer is obliged to make any such deduction or withholding, the amount so deducted or withheld is not guaranteed by the Financial Guarantor.
11 Events of Default
The Events of Default (as defined in the Master Definitions Agreement) relating to the Bonds are set out in Schedule 7 of the Common Terms Agreement.
Following the notification of an Event of Default in respect of the Issuer, the STID provides for a Standstill Period (as defined in the Master Definitions Agreement) to commence and for restrictions to apply to all Secured Creditors of SWS. The Common Terms Agreement also contains various Trigger Events that will, if they occur, (among other things) permit the Majority Creditors to commission an Independent Review, require SWS to discuss its plans for appropriate remedial action and prevent the SWS Financing Group from making further Restricted Payments until the relevant Trigger Events have been remedied.
(a) Events of Default
If any Event of Default occurs and is continuing in relation to the Issuer, subject always to the terms of the STID, the Bond Trustee may at any time (in accordance with the provisions of the Bond Trust Deed and the STID), having certified in writing that in its opinion the happening of such event is materially prejudicial to the interests of the Bondholders and shall upon the Bond Trustee being so directed or requested (i) by an Extraordinary Resolution (as defined in the Bond Trust Deed) of holders of the relevant Sub-Classes of Class A Bonds or, if there are no Class A Bonds outstanding, the Class B Bonds or (ii) in writing by holders of at least one quarter in outstanding nominal amount of the relevant Sub-Classes of Class A Bonds, or if there are no Class A Bonds outstanding, the Class B Bonds and subject, in each case, to being indemnified and/or secured to its satisfaction, give notice to the Issuer and the Security Trustee that the Bonds of the relevant Sub-Class are, and they shall immediately become, due and repayable, at their respective Redemption Amounts determined in accordance with Condition 8(b) (Optional Redemption) (except that, in the case of Fixed Rate Bonds and Indexed Bonds for the purposes of this Condition 11(a), the “Reference Date” means the date two Business Days prior to the despatch of the notice of redemption given under this Condition 11(a)) or as specified in the applicable Final Terms.
(b) Confirmation of no Event of Default
The Issuer, pursuant to the terms of the Common Terms Agreement, shall provide written confirmation to the Bond Trustee, on an annual basis, that no Event of Default has occurred in relation to the Issuer.
200
(c) Enforcement of Security
If the Bond Trustee gives written notice to the Issuer and the Security Trustee that an Event of Default has occurred under the Bonds of any Sub-Class, a Standstill Period shall commence. The Security Trustee may only enforce the Security acting in accordance with the STID and, subject to certain limitations on enforcement during a Standstill Period, on the instructions of the Majority Creditors.
(d) Automatic Acceleration
In the event of the acceleration of the Secured Liabilities (other than a Permitted Share Pledge Acceleration, a Permitted Hedge Termination or a Permitted Lease Termination (as defined in the Master Definitions Agreement) as set out in the STID), the Bonds of each Series shall automatically become due and repayable at their respective Redemption Amounts determined in accordance with Condition 8(b) (Optional Redemption) (except that, in the case of Fixed Rate Bonds and Indexed Bonds for the purposes of this Condition 11(d), “Reference Date” means the date two Business Days prior to the date of such acceleration) or as specified in the applicable Final Terms plus, in each case, accrued and unpaid interest thereon.
12 Enforcement Against Issuer
No Bondholder is entitled to take any action against the Issuer or, in the case of the holders of Wrapped Bonds, against the Financial Guarantor or against any assets of the Issuer or any Financial Guarantor to enforce its rights in respect of the Bonds or to enforce any of the Security or to enforce any Financial Guarantee unless the Bond Trustee or the Security Trustee (as applicable), having become bound so to proceed, fails or neglects to do so within a reasonable period and such failure or neglect is continuing. The Security Trustee will act (subject to Condition 11(c) (Enforcement of Security)) on the instructions of the Majority Creditors pursuant to the STID, and neither the Bond Trustee nor the Security Trustee shall be bound to take any such action unless it is indemnified and/or secured to its satisfaction against all fees, costs, expenses, liabilities, claims and demands to which it may thereby become liable or which it may incur by so doing.
Neither the Bond Trustee nor the Bondholders may institute against, or join any person in instituting against, the Issuer any bankruptcy, winding up, re-organisation, arrangement, insolvency or liquidation proceeding (except for the appointment of a receiver and manager pursuant to the terms of the Security Agreement and subject to the STID) or other proceeding under any similar law for so long as any Bonds are outstanding or for two years and a day after the latest Maturity Date on which any Bond of any Series is due to mature.
13 Prescription
Claims against the Issuer for payment in respect of the Bonds, Receipts or Coupons (which, for this purpose, shall not include Talons) shall be prescribed and become void unless made within ten years (in the case of principal) or five years (in the case of interest) from the appropriate Relevant Date (as defined in Condition 6(i) (Definitions)) in respect thereof.
14 Replacement of Bonds, Coupons, Receipts and Talons
If any Bearer Bond, Registered Bond, Receipt, Coupon or Talon is lost, stolen, mutilated, defaced or destroyed it may be replaced, subject to applicable laws and requirements of the London Stock Exchange (in the case of listed Bonds) (and each other listing authority, stock exchange and or quotation system upon which the relevant Bonds have then been admitted to listing, trading and/or quotation), at the specified office of the Principal Paying Agent or, as the case may be, the Registrar upon payment by the claimant of the expenses incurred in connection with such replacement and on such terms as to evidence, security, indemnity
201
and otherwise as the Issuer may require. Mutilated or defaced Bonds, Receipts, Coupons or Talons must be surrendered before replacements will be issued.
15 Meetings of Bondholders, Modification, Waiver and Substitution
(a) Decisions of Majority Creditors
The STID contains provisions dealing with the manner in which matters affecting the interests of the Secured Creditors (including the Bond Trustee and the Bondholders) will be dealt with, Bondholders will (subject to various Reserved Matters and Entrenched Rights) be bound by the decisions of the Majority Creditors (and additionally in a Default Situation (as defined in the Master Definitions Agreement) decisions made pursuant to the Emergency Instruction Procedure (as set out in Clause 9.12 of the STID)).
In the circumstances which do not relate to Entrenched Rights or Reserved Matters of the Bondholders (as set out in the STID), the Bond Trustee shall be entitled to vote as the DIG Representative (as defined in the Master Definitions Agreement) of holders of each Sub-Class of Wrapped Bonds (following the occurrence of an FG Event of Default (as defined in the Master Definitions Agreement) in respect of the Financial Guarantor of those Wrapped Bonds which is continuing) and of each Sub- Class of Unwrapped Bonds on intercreditor issues (“Intercreditor Issues”) but shall not be entitled to convene a meeting of any one or more Sub-Classes of Bondholders to consider the relevant matter unless a Default Situation is subsisting. If a Default Situation has occurred and is subsisting, the Bond Trustee may vote on Intercreditor Issues in its absolute discretion or shall vote in accordance with a direction by those holders of such outstanding Class A Bonds or, if there are no Class A Bonds outstanding, Class B Bonds (i) by means of an Extraordinary Resolution of the relevant Sub-Class of Bonds or (ii) (in respect of a DIG Proposal (as defined in the Master Definitions Agreement) to terminate a Standstill (as defined in the Master Definitions Agreement)) as requested in writing by the holders of at least one quarter of the Principal Amount Outstanding of the relevant Sub-Class of Class A Bonds then outstanding, or if there are no Class A Bonds outstanding, Class B Bonds. In any case, the Bond Trustee shall not be obliged to vote unless it has been indemnified and/or secured to its satisfaction.
Whilst a Default Situation is subsisting, certain decisions and instructions may be required in a timeframe which does not allow the Bond Trustee to convene Bondholder meetings. To cater for such circumstances, the STID provide for an emergency instruction procedure. The Security Trustee will be required to act upon instructions contained in an emergency notice (an “Emergency Instruction Notice”). An Emergency Instruction Notice must be signed by DIG Representatives (the “EIN Signatories”) representing 66⅔ per cent. or more of the aggregate Outstanding Principal Amount (as defined in the Master Definitions Agreement) of the Qualifying Class A Debt or following repayment in full of the Class A Debt, the Qualifying Class B Debt after, inter alia, excluding the proportion of Qualifying Debt in respect of which the Bond Trustee is the DIG Representative and in respect of which the Bond Trustee has not voted. The Emergency Instruction Notice must specify the emergency action which the Security Trustee is being instructed to take and must certify that, unless such action is taken within the time frame specified in the Emergency Instruction Notice, the interests of the EIN Signatories will be materially prejudiced.
(b) Meetings of Bondholders
The Bond Trust Deed contains provisions for convening meetings of the Bondholders to consider any matter affecting their interests, including the modification of the Bonds, the Receipts, the Coupons or any of the provisions of the Bond Trust Deed (in the case of Class A Wrapped Bonds and Class B Wrapped Bonds), the Financial Guarantees and any other Finance Document to which the Bond Trustee is a party (subject to the terms of the STID)). Any modification may (except in relation to any
202
Entrenched Right or Reserved Matter of the Bond Trustee (as set out in the STID) subject to the terms of the STID including, in the case of any of the Class A Wrapped Bonds or Class B Wrapped Bonds, to Entrenched Rights or Reserved Matters of any Financial Guarantor (as set out in the STID) and subject to the provisions concerning ratification and/or meetings of particular combinations of Sub-Classes of Bonds as set out in Condition 16(b) (Exercise of rights by Bond Trustee) and the Bond Trust Deed), be made if sanctioned by a resolution passed at a meeting of such Bondholders duly convened and held in accordance with the Bond Trust Deed by a majority of not less than three-quarters of the votes cast (an “Extraordinary Resolution”) at such meeting. Such a meeting may be convened by the Bond Trustee or the Issuer, and shall be convened by the Issuer upon the request in writing of the relevant Bondholders holding not less than one-tenth in nominal amount of the relevant Bonds for the time being outstanding.
The quorum at any meeting convened to vote on an Extraordinary Resolution will be one or more persons holding or representing not less than 50 per cent. in nominal amount of the relevant Bonds for the time being outstanding or, at any adjourned meeting, one or more persons being or representing Bondholders, whatever the nominal amount of the relevant Bonds held or represented, provided however, that certain matters as set out in paragraph 5 of the Fourth Schedule to the Bond Trust Deed (the “Basic Terms Modifications”) in respect of the holders of any particular Sub-Class of Bonds may be sanctioned only by an Extraordinary Resolution passed at a meeting of Bondholders of the relevant Sub-Class of Bonds at which one or more persons holding or representing not less than three-quarters or, at any adjourned meeting, one-quarter in nominal amount of the outstanding Bonds form a quorum. Any Extraordinary Resolution duly passed at any such meeting shall be binding on all the relevant Bondholders, Receiptholders and Couponholders whether present or not.
In addition, a resolution in writing signed by or on behalf of all Bondholders who for the time being are entitled to receive notice of a meeting of Bondholders under the Bond Trust Deed will take effect as if it were an Extraordinary Resolution. Such a resolution in writing may be contained in one document or several documents in the same form, each signed by or on behalf of one or more Bondholders.
(c) Modification, consent and waiver
As more fully set out in the Bond Trust Deed (and subject to the conditions and qualifications therein), the Bond Trustee may, without the consent of the Bondholders of any Sub-Class, concur with the Issuer or any other relevant parties in making (i) any modification of these Conditions, the Bond Trust Deed, any Financial Guarantee or any Finance Document which is of a formal, minor or technical nature or is made to correct a manifest error; and (ii) (except as mentioned in the Bond Trust Deed and subject to the terms of the STID) any other modification and granting any consent under or waiver or authorisation of any breach or proposed breach of these Conditions, the Bond Trust Deed, such Financial Guarantee or any such Finance Document or other document which is, in the opinion of the Bond Trustee, not materially prejudicial to the interests of the Bondholders of that Sub-Class. Any such modification, consent, waiver or authorisation shall be binding on the Bondholders of that Sub- Class, and the holders of all relevant Receipts and Coupons and, if the Bond Trustee so requires, notice thereof shall be given by the Issuer to the Bondholders of that Sub-Class as soon as practicable thereafter.
The Bond Trustee shall be entitled to assume that any such modification, consent, waiver or authorisation is not materially prejudicial to the Bondholders if the Rating Agencies confirm that there will not be any adverse effect thereof on the original issue ratings of the Bonds.
203
(d) Substitution of the Issuer
As more fully set forth in the STID (and subject to the conditions and qualifications therein), the Bond Trustee may also agree with the Issuer, without reference to the Bondholders, to the substitution of another corporation in place of the Issuer as principal debtor in respect of the Bond Trust Deed and the Bonds of all Series and subject to the Class A Wrapped Bonds continuing to carry the unconditional guarantee of the relevant Financial Guarantor.
16 Bond Trustee Protections
(a) Trustee considerations
Subject to the terms of the STID and Condition 16(b) (Exercise of rights by Bond Trustee), in connection with the exercise, under these Conditions, the Bond Trust Deed, any Financial Guarantee or any Finance Document, of its rights, powers, trusts, authorities and discretions (including any modification, consent, waiver or authorisation), the Bond Trustee shall have regard to the interests of the holders of the relevant Series of Class A Bonds, or if there are no Class A Bonds outstanding, the Class B Bonds then outstanding provided that, if the Bond Trustee considers, in its sole opinion, that there is a conflict of interest between the holders of two or more Sub-Classes of Bonds of such Class, it shall consider the interests of the holders of the Sub-Class of Class A Bonds, or if there are no Class A Bonds outstanding, the Class B Bonds outstanding with the shortest dated maturity and will not have regard to the consequences of such exercise for the holders of other Sub-Classes of Bonds or for individual Bondholders, resulting from their being for any purpose domiciled or resident in, or otherwise connected with, or subject to the jurisdiction of, any particular territory. The Bond Trustee shall not be entitled to require from the Issuer or any Financial Guarantor, nor shall any Bondholders be entitled to claim from the Issuer, any Financial Guarantor or the Bond Trustee, any indemnification or other payment in respect of any consequence (including any tax consequence) for individual Bondholders of any such exercise.
(b) Exercise of rights by Bond Trustee
Except as otherwise provided in these Conditions and the Bond Trust Deed, when exercising any rights, powers, trusts, authorities and discretions relating to or contained in these Conditions or the Bond Trust Deed (other than in determining or in respect of any Entrenched Right or Reserved Matter relating to the Bonds or any other Basic Terms Modification), which affects or relates to any Class A Wrapped Bonds and/or Class B Wrapped Bonds, the Bond Trustee shall only act with the consent of the relevant Financial Guarantor(s) (provided no FG Event of Default has occurred and is continuing) in accordance with the provisions of the Bond Trust Deed and the Bond Trustee shall not be required to have regard to the interests of the Bondholders in relation to the exercise of such rights, powers, trusts, authorities and discretions and shall have no liability to any Bondholders as a consequence of so acting. As a consequence of being required to act only with the consent of the relevant Financial Guarantor(s) in the circumstances referred to in the previous sentence, the Bond Trustee may not, notwithstanding the provisions of these Conditions, be entitled to act on behalf of the holders of any Sub-Classes of Bonds. Subject as provided in these Conditions and the Bond Trust Deed, the Bond Trustee will exercise its rights under, or in relation to, the Bond Trust Deed, the Conditions or any Financial Guarantee in accordance with the directions of the relevant Bondholders, but the Bond Trustee shall not be bound as against the Bondholders to take any such action unless it has (i) (a) (in respect of the matters set out in Condition 11 (Events of Default) and Condition 15(a) (Decisions of the Majority Creditors) only) been so requested in writing by the holders of at least 25 per cent. in nominal amount of the relevant Sub-Classes of Bonds outstanding or (b) been so directed by an Extraordinary Resolution and (ii) been indemnified and/or furnished with security to its satisfaction.
204
(c) Decisions under STID binding on all Bondholders
Subject to the provisions of the STID and the Entrenched Rights and Reserved Matters of the Bond Trustee and the Bondholders, decisions of the Majority Creditors and (in a Default Situation) decisions made pursuant to the Emergency Instructions Procedures will bind the Bond Trustee and the Bondholders in all circumstances.
17 Notices
Notices to holders of Registered Bonds will be posted to them at their respective addresses in the Register and deemed to have been given on the date of posting. Other notices to Bondholders will be valid if published in a leading daily newspaper having general circulation in London (which is expected to be the Financial Times). The Issuer shall also ensure that all notices are duly published in a manner which complies with the rules and regulations of the London Stock Exchange and any other listing authority, stock exchange and/or quotation system on which the Bonds are for the time being listed. Any such notice (other than to holders of Registered Bonds as specified above) shall be deemed to have been given on the date of such publication or, if published more than once or on different dates, on the first date on which publication is made. Couponholders and Receiptholders will be deemed for all purposes to have notice of the contents of any notice given to the holders of Bearer Bonds in accordance with this Condition 17.
So long as any Bonds are represented by Global Bonds, notices in respect of those Bonds may be given by delivery of the relevant notice to Euroclear Bank S.A./N.V. as operator of the Euroclear System or Clearstream Banking, société anonyme or any other relevant clearing system as specified in the relevant Final Terms for communication by them to entitled account holders in substitution for publication in a daily newspaper with general circulation in London. Such notices shall be deemed to have been received by the Bondholders on the day of delivery to such clearing systems.
18 Indemnification Of The Bond Trustee And Security Trustee
(a) Indemnification of the Bond Trustee
The Bond Trust Deed contains provisions for indemnification of the Bond Trustee, and for its relief from responsibility, including provisions relieving it from taking any action including taking proceedings against the Issuer, any Financial Guarantor and or any other person unless indemnified and/or secured to its satisfaction. The Bond Trustee or any of its affiliates (as defined in Condition 7 (Indexation)) are entitled to enter into business transactions with the Issuer, any Financial Guarantor, the other Secured Creditors or any of their respective subsidiaries or associated companies without accounting for any profit resulting therefrom.
(b) Indemnification of the Security Trustee
Subject to the Entrenched Rights and Reserved Matters of the Security Trustee, the Security Trustee will only be required to take any action under or in relation to, or to enforce or protect the Security, or any other security interest created by a Finance Document, or a document referred to therein, if instructed to act by the Majority Creditors or Secured Creditors (or their representatives) (as appropriate) and if indemnified to its satisfaction.
(c) Directions, Duties and Liabilities
Neither the Security Trustee nor the Bond Trustee, in the absence of its own wilful misconduct, gross negligence or fraud, and in all cases when acting as directed by or subject to the agreement of the Majority Creditors or Secured Creditors (or their representatives) (as appropriate), shall in any way be responsible for any loss, costs, damages or expenses or other liability, which may result from the exercise or non-exercise of any consent, waiver, power, trust, authority or discretion vested in the
205
Security Trustee or the Bond Trustee pursuant to the STID, any Finance Document or any Ancillary Document (as defined in the Master Definitions Agreement).
19 European Economic and Monetary Union
(a) Notice of redenomination
The Issuer may, without the consent of the Bondholders, and on giving at least 30 days’ prior notice to the Bondholders, the Financial Guarantors, the Bond Trustee and the Principal Paying Agent, designate a date (the “Redenomination Date”), being an Interest Payment Date under the Bonds falling on or after the date on which the United Kingdom becomes a Participating Member State.
(b) Redenomination
Notwithstanding the other provisions of these Conditions, with effect from the Redenomination Date:
(i) the Bonds of each Sub-Class denominated in sterling (the “Sterling Bonds”) shall be deemed to be redenominated into Euro in the denomination of Euro 0.01 with a principal amount for each Bond equal to the principal amount of that Bond in sterling, converted into Euro t the rate for conversion of such currency into Euro established by the Council of the European Union pursuant to the Treaty establishing the European Union, as amended, (including compliance with rules relating to rounding in accordance with European Community regulations), provided, however, that, if the Issuer determines, with the agreement of the Bond Trustee, that the then current market practice in respect of the redenomination into Euro 0.01 of internationally offered securities is different from that specified above, such provisions shall be deemed to be amended so as to comply with such market practice and the Issuer shall promptly notify the Bondholders, the London Stock Exchange and any stock exchange (if any) on which the Bonds are then listed and the Principal Paying Agent of such deemed amendments;
(ii) if Bonds have been issued in definitive form:
(a) all Bonds denominated in sterling will become void with effect from the date (the “Euro Exchange Date”) on which the Issuer gives notice (the “Euro Exchange Notice”) to the Bondholders and the Bond Trustee that replacement Bonds denominated in Euro are available for exchange (provided that such Bonds are available) and no payments will be made in respect thereof;
(b) the payment obligations contained in all Bonds denominated in sterling will become void on the Euro Exchange Date but all other obligations of the Issuer thereunder (including the obligation to exchange such Bonds in accordance with this Condition 19) shall remain in full force and effect; and
(c) new Bonds denominated in Euro will be issued in exchange for Sterling Bonds in such manner as the Principal Paying Agent or the Registrar, as the case may be, may specify and as shall be notified to the Bondholders in the Euro Exchange Notice;
(iii) all payments in respect of the Sterling Bonds (other than, unless the Redenomination Date is on or after such date as sterling ceases to be a sub-division of the Euro, payments of interest in respect of periods commencing before the Redenomination Date) will be made solely in Euro by cheque drawn on, or by credit or transfer to a Euro account (or any other account to which Euro may be credited or transferred) maintained by the payee with, a bank in the principal financial centre of any Participating Member State; and
(iv) a Bond may only be presented for payment on a day which is a business day in the place of presentation.
206
(c) Interest
Following redenomination of the Bonds pursuant to this Condition 19:
(i) where Sterling Bonds have been issued in definitive form, the amount of interest due in respect of the Sterling Bonds will be calculated by reference to the aggregate principal amount of the Sterling Bonds presented for payment by the relevant holder and the amount of such payment shall be rounded down to the nearest Euro 0.01; and
(ii) the amount of interest payable in respect of each Sub-Class of Sterling Bonds for any Interest Period shall be calculated by applying the Interest Rate applicable to the Sub-Class of Bonds denominated in Euro ranking pari passu to the relevant Sub-Class.
20 Miscellaneous
(a) Governing Law
The Bond Trust Deed, STID, the Security Agreement, the Bonds, the Coupons, the Receipts, the Talons (if any), the relevant Financial Guarantee (if any) and the other Finance Documents are, and all matters arising from or in connection with such documents shall be governed by, and shall be construed in accordance with, English law.
(b) Jurisdiction
The courts of England are to have exclusive jurisdiction to settle any dispute that may arise out of or in connection with the Bonds, the Coupons, the Receipts, the Talons, the relevant Financial Guarantee (if any) and the Finance Documents and accordingly any legal action or proceedings arising out of or in connection with the Bonds, the Coupons, the Receipts, the Talons (if any) the relevant Financial Guarantee (if any) and/or the Finance Document may be brought in such courts. The Issuer has in each of the Finance Documents irrevocably submitted to the jurisdiction of such courts.
(c) Third Party Rights
No person shall have any right to enforce any term or condition of the Bonds or the Bond Trust Deed under the Contracts (Rights of Third Parties) Act 1999.
Forms of the Bonds
Form and Exchange - Bearer Bonds
Each Sub-Class of Bonds initially issued in bearer form will be issued either as a temporary global bond (the “Temporary Global Bond”), without Receipts, Coupons or Talons attached, or a permanent global bond (the “Permanent Global Bond”), without Receipts, Coupons or Talons attached, in each case as specified in the relevant Final Terms. Each Temporary Global Bond or, as the case may be, Permanent Global Bond (each a “Global Bond”) will be delivered on or prior to the issue date of the relevant Sub-Class of the Bonds to a depositary or a common depositary for Euroclear and/or Clearstream, Luxembourg and/or any other relevant clearing system on or about the Issue Date of the relevant Sub-Class.
The relevant Final Terms will also specify whether United States Treasury Regulation §1.163- 5(c)(2)(i)(C) (the “TEFRA C Rules”) or United States Treasury Regulation §1.163-5(c)(2)(i)(D) (the “TEFRA D Rules”) are applicable in relation to the Bonds.
Temporary Global Bond exchangeable for Permanent Global Bond
If the relevant Final Terms specify the form of Bonds as being represented by “Temporary Global Bond exchangeable for a Permanent Global Bond”, then the Bonds will initially be in the form of a
207
Temporary Global Bond which will be exchangeable, in whole or in part, for interests in a Permanent Global Bond, without Receipts, Coupons or Talons attached, not earlier than 40 days after the Issue Date of the relevant Sub-Class of the Bonds upon certification as to non-U.S. beneficial ownership. No payments will be made under the Temporary Global Bond unless exchange for interests in the Permanent Global Bond is improperly withheld or refused. In addition, payments of interest in respect of the Bonds cannot be collected without such certification of non-U.S. beneficial ownership.
Whenever any interest in the Temporary Global Bond is to be exchanged for an interest in a Permanent Global Bond, the Issuer shall procure (in the case of first exchange) the prompt delivery (free of charge to the bearer) of such Permanent Global Bond, duly authenticated, to the bearer of the Temporary Global Bond or (in the case of any subsequent exchange) an increase in the principal amount of the Permanent Global Bond in accordance with its terms against:
– presentation and (in the case of final exchange) surrender of the Temporary Global Bond at the specified office of the Paying Agent; and
– receipt by the Paying Agent of a certificate or certificates of non-U.S. beneficial ownership issued by Euroclear and/or Clearstream, Luxembourg and/or any other relevant clearing system,
within seven days of the bearer requesting such exchange.
The principal amount of the Permanent Global Bond shall be equal to the aggregate of the principal amounts specified in the certificates of non-U.S beneficial ownership; provided, however, that in no circumstances shall the principal amount of the Permanent Global Bond exceed the aggregate initial principal amount of the Temporary Global Bond and any Temporary Global Bond representing a fungible Sub-Class of Bonds with the Sub-Class of Bonds represented by the first Temporary Global Bond.
The Permanent Global Bond will be exchangeable in whole, but not in part, for Bonds in definitive form (“Definitive Bonds”):
– on the expiry of such period of notice as may be specified in the relevant Final Terms; or
– at any time, if so specified in the relevant Final Terms; or
– if the relevant Final Terms specify “in the limited circumstances described in the Permanent Global Bond”, then if (a) Euroclear or Clearstream, Luxembourg or any other relevant clearing system is closed for business for a continuous period of 14 days (other than by reason of legal holidays) or announces an intention permanently to cease business or (b) any of the circumstances described in Condition 11(a) (Events of Default) occurs; or
– the Issuer certifies to the Bond Trustee that it has or will, on the next payment date for interest or principal, become subject to adverse tax consequences which would not be suffered if the Bonds are not represented by a Permanent Global Bond.
Whenever the Permanent Global Bond is to be exchanged for Definitive Bonds, the Issuer shall procure the prompt delivery (free of charge to the bearer) of such Definitive Bonds, duly authenticated and with Receipts, Coupons and Talons attached (if so specified in the relevant Final Terms), in an aggregate principal amount equal to the principal amount of the Permanent Global Bond to the bearer of the Permanent Global Bond against the surrender of the Permanent Global Bond at the Specified Office of the Paying Agent within 30 days of the bearer requesting such exchange but not earlier than 40 days after the Issue Date of such Bonds.
Temporary Global Bond exchangeable for Definitive Bonds
208
If the relevant Final Terms specifies the form of Bonds as being “Temporary Global Bond exchangeable for Definitive Bonds” and also specifies that the TEFRA C Rules are applicable or that neither the TEFRA C Rules nor the TEFRA D Rules are applicable, then the Bonds will initially be in the form of a Temporary Global Bond which will be exchangeable, in whole but not in part, for Definitive Bonds not earlier than 40 days after the Issue Date of the relevant Sub-Class of the Bonds.
If the relevant Final Terms specifies the form of Bonds as being “Temporary Global Bond exchangeable for Definitive Bonds” and also specifies that the TEFRA D Rules are applicable, then the Bonds will initially be in the form of a Temporary Global Bond which will be exchangeable, in whole or in part, for Definitive Bonds not earlier than 40 days after the Issue Date of the relevant Sub-Class of the Bonds upon certification as to non-U.S. beneficial ownership. Interest payments in respect of the Bonds cannot be collected without such certification of non-U.S. beneficial ownership.
Whenever the Temporary Global Bond is to be exchanged for Definitive Bonds, the Issuer shall procure the prompt delivery (free of charge to the bearer) of such Definitive Bonds, duly authenticated and with Receipts, Coupons and Talons attached (if so specified in the relevant Final Terms), in an aggregate principal amount equal to the principal amount of the Temporary Global Bond so exchanged to the bearer of the Temporary Global Bond against the presentation (and in the case of final exchange, surrender) of the Temporary Global Bond at the Specified Office of the Paying Agent within 30 days of the bearer requesting such exchange but not earlier than 40 days after the issue of such Bonds.
Permanent Global Bond exchangeable for Definitive Bonds
If the relevant Final Terms specifies the form of Bonds as being “Permanent Global Bond exchangeable for Definitive Bonds”, then the Bonds will initially be in the form of a Permanent Global Bond which will be exchangeable in whole, but not in part, for Definitive Bonds:
– on the expiry of such period of notice as may be specified in the relevant Final Terms; or
– at any time, if so specified in the relevant Final Terms; or
– if the relevant Final Terms specifies “in the limited circumstances described in the Permanent Global Bond”, then if (a) Euroclear or Clearstream, Luxembourg or any other relevant clearing system is closed for business for a continuous period of 14 days (other than by reason of legal holidays) or announces an intention permanently to cease business or (b) any of the circumstances described in Condition 11(a) (Events of Default) occurs; or
– the Issuer certifies to the Bond Trustee that it has or will, on the next payment date for interest or principal, become subject to adverse tax consequences which would not be suffered if the Bonds are not represented by a Permanent Global Bond.
Whenever the Permanent Global Bond is to be exchanged for Definitive Bonds, the Issuer shall procure the prompt delivery (free of charge to the bearer) of such Definitive Bonds, duly authenticated and with Receipts, Coupons and Talons attached (if so specified in the relevant Final Terms), in an aggregate principal amount equal to the principal amount of the Permanent Global Bond to the bearer of the Permanent Global Bond against the surrender of the Permanent Global Bond at the Specified Office of the Paying Agent within 30 days of the bearer requesting such exchange but not earlier than 40 days after the Issue Date of such Bonds.
In the event that a Global Bond is exchanged for Definitive Bonds, such Definitive Bonds shall be issued in Specified Denominations(s) only. Bondholders who hold Bonds in the relevant clearing system in amounts that are not integral multiples of a Specified Denomination may need to purchase or sell, on or before the relevant date of exchange, a principal amount of Bonds such that their holding is an integral multiple of a Specified Denomination.
209
Conditions applicable to the Bonds
The Conditions applicable to any Definitive Bond will be endorsed on that Bond and will consist of the Conditions set out under “Terms and Conditions of the Bonds” above and the provisions of the relevant Final Terms which supplement, amend, vary and/or replace those Conditions.
The Conditions applicable to any Global Bond will differ from those Conditions which would apply to the Definitive Bond to the extent described under “Provisions Relating to the Global Bonds”.
Legend concerning United States persons
Global Bonds and Definitive Bonds having a maturity of more than 365 days and any Receipts, Coupons and Talons appertaining thereto will bear a legend to the following effect:
“Any United States person who holds this obligation will be subject to limitations under the United States income tax laws, including the limitations provided in Sections 165(j) and 1287(a) of the Internal Revenue Code.”
The sections referred to in such legend provide that a United States person who holds a Bond, Receipt, Coupon or Talon will generally not be allowed to deduct any loss realised on the sale, exchange or redemption of such Bond, Receipt, Coupon or Talon and any gain (which might otherwise be characterised as capital gain) recognised on such sale, exchange or redemption will be treated as ordinary income.
Form and Exchange - Global Bond Certificates
Global Certificates
Registered Bonds held in Euroclear and/or Clearstream, Luxembourg and/or other clearing system will be represented by a global bond certificate (each a “Global Bond Certificate”) which will be registered in the name of a nominee for, and deposited with, a depositary for Euroclear and/or Clearstream, Luxembourg and/or such other relevant clearing system on or about the Issue Date of the relevant Sub-Class.
Exchange
The Global Bond Certificate will become exchangeable in whole, but not in part, for individual bond certificates (each an “Individual Bond Certificate”) if (a) Euroclear or Clearstream, Luxembourg and/or other relevant clearing system is closed for business for a continuous period of 14 days (other than by reason of legal holidays) or announces an intention permanently to cease business, (b) any of the circumstances described in Condition 11(a) (Events of Default) occurs, (c) at any time at the request of the registered Holder if so specified in the Final Terms or (d) the Issuer certifies to the Bond Trustee that it has or will, on the next payment date for interest or principal, become subject to adverse tax consequences which would not be suffered if the Bonds are not represented by a Global Bond Certificate.
Whenever the Global Bond Certificate is to be exchanged for Individual Bond Certificates, such will be issued in an aggregate principal amount equal to the principal amount of the Global Bond Certificate within seven business days of the delivery, by or on behalf of the registered Holder of the Global Bond Certificate to the Registrar or the Transfer Agents (as the case may be) of such information as is required to complete and deliver such Individual Bond Certificates (including the names and addresses of the persons in whose names the Individual Bond Certificates are to be registered and the principal amount of each such person’s holding) against the surrender of the Global Bond Certificate at the specified office of the Registrar or the Transfer Agent (as the case may be). Such exchange will be effected in accordance with the provisions of the Agency Agreement and the regulations concerning the transfer and registration of Bonds scheduled thereto and, in particular, shall
210
be effected without charge to any holder, but against such indemnity as the Registrar or the Transfer Agents (as the case may be) may require in respect of any tax or other duty of whatsoever nature which may be levied or imposed in connection with such exchange.
Rights Against Issuer
Under the Bond Trust Deed, persons shown in the records of Euroclear and/or Clearstream, Luxembourg and/or any other relevant clearing system as being entitled to interests in the Bonds will (subject to the terms of the Bond Trust Deed and the STID) acquire directly against the Issuer all those rights to which they would have been entitled if, immediately before the Global Bond or Global Bond Certificate became void, they had been the registered Holders of Bonds in an aggregate principal amount equal to the principal amount of Bonds they were shown as holding in the records of Euroclear, Clearstream, Luxembourg or any other relevant clearing system (as the case may be).
Provisions Relating to the Bonds While in Global Form
Clearing System Accountholders
References in the Conditions of the Bonds to “Bondholder” are references to the bearer of the relevant Global Bond or the person shown in the records of the relevant clearing system as the holder of the Global Bond Certificate.
Each of the persons shown in the records of Euroclear and/or Clearstream, Luxembourg and/or any other relevant clearing system, as the case may be, as being entitled to an interest in a Global Bond or a Global Bond Certificate (each an “Accountholder”) must look solely to Euroclear and/or Clearstream, Luxembourg and/or such other relevant clearing system (as the case may be) for such Accountholder’s share of each payment made by the Issuer or, in the case of Wrapped Bonds, the relevant Financial Guarantor, to such Accountholder and in relation to all other rights arising under the Global Bond or Global Bond Certificate. The extent to which, and the manner in which, Accountholders may exercise any rights arising under a Global Bond or Global Bond Certificate will be determined by the respective rules and procedures of Euroclear and Clearstream, Luxembourg and any other relevant clearing system (as the case may be) from time to time. For so long as the relevant Bonds are represented by a Global Bond or Global Bond Certificate, Accountholders shall have no claim directly against the Issuer or, in the case of Wrapped Bonds, the relevant Financial Guarantor in respect of payments due under the Bonds and such obligations of the Issuer and, in the case of Wrapped Bonds, the relevant Financial Guarantor will be discharged by payment to the bearer of the Global Bond or the registered holder of the Global Bond Certificate, as the case may be.
Amendment to Conditions
Global Bonds will contain provisions that apply to the Bonds which they represent, some of which modify the effect of the Conditions of the Bonds as set out in this Prospectus. The following is a summary of certain of those provisions:
*Meetings: The holder of a Global Bond or Global Bond Certificate shall be treated as being two persons for the purposes of any quorum requirements of a meeting of Bondholders and, at any such meeting, the holder of a Global Bond or Global Bond Certificate shall be treated as having one vote in respect of each minimum denomination of Bonds for which such Global Bond or Global Bond Certificate may be exchanged.
*Cancellation: Cancellation of any Bond represented by a Global Bond or Global Bond Certificate that is required by the Conditions to be cancelled (other than upon its redemption) will be effected by reduction in the principal amount of the relevant Global Bond or Global Bond Certificate.
*Notices: So long as any Bonds are represented by a Global Bond or Global Bond Certificate and such Global Bond or Global Bond Certificate is held on behalf of Euroclear, Clearstream, Luxembourg or any other relevant Clearing System, notices to the Bondholders may be given, subject always to listing requirements, by delivery of the relevant notice to Euroclear, Clearstream, Luxembourg or any other relevant Clearing System for communication by it to entitled Accountholders in substitution for publication as provided in the Conditions.
211
PRO FORMA FINAL TERMS
Set out below is the form of Final Terms which will be completed for each Tranche of Bonds issued under the Programme.
Final Terms dated [–]
SOUTHERN WATER SERVICES (FINANCE) LIMITED
Issue of [Sub-Class [-[–] (delete as appropriate)] [Aggregate Nominal Amount of Sub-Class]
[Title of Bonds]
[(if Class A Wrapped Bonds or Class B Wrapped Bonds issued including the following:)]:
unconditionally and irrevocably guaranteed as to scheduled payments of principal and interest
by
[Name of Financial Guarantor]]
under the £6,000,000,000 Guaranteed Bond Programme
PART A – CONTRACTUAL TERMS
Terms used herein shall be deemed to be defined as such for the purposes of the conditions set forth in the Prospectus dated [–] [and the supplemental Prospectus dated [–] which [together] constitute[s] (i) a base prospectus for the purposes of the Prospectus Directive (Directive 2003/71/EC) (the “Prospectus Directive”) and (ii) listing particulars for the purposes of Listing Rule 2.2.11 of the Listing Rules of the Financial Services Authority (the “Listing Rules”). This document constitutes the Final Terms of the Bonds described herein for the purposes of [Article 5.4 of the Prospectus Directive] [Listing Rule 4.2.3 of the Listing Rules] and must be read in conjunction with such Prospectus [as so supplemented]. Full information on the Issuer, the Guarantor(s) and the offer of the Bonds is only available on the basis of the combination of these Final Terms and the Prospectus [as so supplemented]. [The Prospectus [and the supplemental Prospectus] [is] [are] available for viewing at [–].]
[The following alternative language applies if the first tranche of an issue which is being increased was issued under a Prospectus with an earlier date.]
[Terms used herein shall be deemed to be defined as such for the purposes of the Conditions (the “Conditions”) set forth in the Prospectus dated [original date] [and the supplemental Prospectus dated [–]. This document constitutes the Final Terms of the Bonds described herein for the purposes of [Article 5.4 of the Prospectus Directive (Directive 2003/71/EC) (the “Prospectus Directive”)]1 [and Listing Rule 4.2.3 of the Listing Rules of the Financial Services Authority (the “Listing Rules”)]2 and must be read in conjunction with the Prospectus dated [current date] [and the supplemental Prospectus dated [–], which [together] constitute[s] a base prospectus for the purposes of the Prospectus Directive and (ii) listing particulars for the purposes of Listing Rule 2.2.11 of the Listing Rules, save in respect of the Conditions which are extracted from the Prospectus dated [original date] [and the supplemental Prospectus dated [–]] and are attached hereto. Full information on the Issuer and the offer of the Bonds is only available on the basis of the combination of these Final Terms and the Prospectuses dated [original date] and [current date] [and the supplemental Prospectuses dated [–] and [–]. [The Prospectuses [and the supplemental Prospectuses] are available for viewing at [–].]
1 Delete wording in square brackets if the Bonds are to be listed on the London Stock Exchange’s Professional Securities Market. 2 Delete wording in square brackets if the Bonds are to be listed on the London Stock Exchange’s Regulated Market.
212
[Repayment of the principal and payment of any interest or premium in connection with the Bonds has not been guaranteed by the Financial Guarantor (as referred to below) or by any other financial institution.]
[Note: include above paragraph if neither Class A Wrapped Bonds nor Class B Wrapped Bonds being described in the Final Terms.]
[When completing Final Terms or adding any other final terms or information consideration should be given as to whether such terms or information constitute (i) (in the case of an application to list the Bonds on the London Stock Exchange’s Regulated Market) “significant new factors” and consequently trigger the need for a supplement to the Prospectus under Article 16 of the Prospectus Directive or (ii) (in the case of an application to list the Bonds on the London Stock Exchange’s Professional Securities Market) “a significant change” and consequently trigger the need for a supplement to the Prospectus under section 81 of the FSMA.]
[Include whichever of the following apply or specify as “Not Applicable” (N/A). Note that the numbering should remain as set out below, even if “Not Applicable” is indicated for individual paragraphs or sub- paragraphs. Italics denote directions for completing the Final Terms.]
1 (i) Issuer: Southern Water Services (Finance) Limited (ii) Guarantors: Southern Water Services Limited, SWS Holdings Limited and SWS Group Holdings Limited (iii) Financial Guarantor: [Name of Financial Guarantor] [delete if not Wrapped Bonds] 2 (iii) Series Number: [–] (iv) Sub-Class Number: [–] (If fungible with an existing Sub- Class, details of that Sub-Class, including the date on which the Bonds become fungible.) 3 Relevant Currency or Currencies: [–] 4 Aggregate Nominal Amount of Bonds admitted to trading:
(i) Series: [–] (ii) Tranche: [–] (iii) Sub-Class: [–] 5 (i) Issue Price: [–] per cent. of the Aggregate Nominal Amount [plus accrued interest from [insert date]] (in the case of fungible issues only, if applicable)]
213
46 (i) Specified Denominations: [–] (To avoid certain on-going reporting obligations under the Transparency Directive and to fall within the wholesale debt securities regime, the minimum denomination should be Euro 50,000 or equivalent if Bonds to be listed on an EU regulated market. In the case of Registered Bonds, this means the minimum integral amount in which transfers can be made). Bonds (including Bonds denominated in Sterling) in respect of which the issue proceeds are to be accepted by the Issuer in the United Kingdom or whose issue otherwise constitutes a contravention of section 19 FSMA and which have a maturity of less than one year must have a minimum redemption value of £100,000 (or its equivalent in other currencies).) [€50,000 and integral multiples of [€1,000] in excess thereof up to and including [€99,000]. No notes in definitive form will be issued with a denomination above [€99,000].] (ii) Calculation Amount: [–] 7 (i) Issue Date: [–] (ii) Interest Commencement Date (if [–] different from the Issue Date): 8 Maturity Date: [specify date or (for Floating Rate Bonds) Interest Payment Date falling in or nearest to [the relevant month and year]] 9 Instalment Date: [Not Applicable/specify] 10 Interest Basis: [[–] per cent. Fixed Rate] [[specify reference rate] +/- [–] per cent. Floating Rate] [Zero Coupon] [Index Linked Interest] [specify other] 11 Redemption/Payment Basis: [Redemption at par] [Index Linked Redemption] [Partly Paid] [Instalment] [Dual Currency] [specify other] 12 Change of Interest or Redemption/Payment [Specify details of any provision for convertibility of Basis: Bonds into another interest or redemption/payment basis] 13 Call Options: Issuer Call Option [(further particulars specified below)] 14 (i) Status and Ranking: [if Class A Wrapped Bonds or Class A Unwrapped Bonds] The Class A Wrapped Bonds and Class A
214
Unwrapped Bonds rank pari passu among each other in terms of interest and principal payments and rank in priority to the Class B Bonds. [if Class B Bonds:] The Class B Wrapped Bonds and the Class B Unwrapped Bonds rank pari passu among each other and are subordinated in terms of interest and principal payments to the Class A Bonds. (ii) Status of the Guarantees: Senior (iii) Status of the Financial Guarantee: The Financial Guarantee will rank pari passu with all unsecured obligations of the Financial Guarantor. [Only required if Wrapped Bonds. Specify for Financial Guarantor] (iv) FG Event of Default: [(v)] [Date [Board] approval for issuance [–] and [–] respectively]] of Bonds and Guarantee obtained: (N.B. Only relevant where Board (or similar) authorisation is required for the particular tranche of Bonds) 15 Method of distribution: [Syndicated/Non-syndicated] PROVISIONS RELATING TO INTEREST (IF ANY) PAYABLE 16 Fixed Rate Bond Provisions: [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph) (i) Interest Rate: [–] per cent. per annum [payable [annually/semi- annually/quarterly/monthly] in arrear] (ii) Interest Determination Date: [–] in each year (insert regular interest payment dates, ignoring issue date or maturity date in the case of a long or short first or last coupon - only relevant where day count fraction is Actual/Actual (ICMA)) (iii) Interest Payment Date(s): [–] in each year [adjusted in accordance with [specify Business Day Convention and applicable Business Centre(s)for the definition of “Business Day”]/not adjusted] (iv) First Interest Payment Date [–] (v) Fixed Coupon Amount[(s)]: [–] per [–] in Calculation Amount (vi) Day Count Fraction: [Actual/Actual ICMA] [Actual/Actual or Actual/Actual- ISDA] [Actual/365 Fixed] [Actual/360] [30/360 or 360/360 or bond basis] [30E/360 or Eurobond Basis] [30E/360 (ISDA)] (vii) Other terms relating to the method [Not Applicable/give details] of calculating interest for Fixed Rate Bonds: (viii) Reference Gilt: [–] 17 Floating Rate Bond Provisions: [Applicable/Not Applicable]
215
(If not applicable, delete the remaining sub-paragraphs of this paragraph) (i) Interest Period(s)/Specified Interest [–] Payment Dates: (ii) First Interest Payment Date: [–] (iii) Business Day Convention: [Following Business Day Convention/Modified Following Business Day Convention/Preceding Business Day Convention/other (give details)] (iv) Business Centre: [–] (v) Manner in which the Rate(s) of [Screen Rate Determination/ISDA Determination/other Interest is/are to be determined: (give details)] (vi) Party responsible for calculating the [Not Applicable/Calculation Agent] Rate(s) of Interest, Interest Amount(s) and Redemption Amount (if not the Agent Bank): (vii) Screen Rate Determination: – Relevant Rate: [–] – Interest Determination [–] Date(s): – Page: [–] – Relevant Time: [local time when Relevant Rate set] (viii) ISDA Determination: – Floating Rate Option: [–] – Designated Maturity: [–] – Specified Duration: [if other than the relevant Interest Period] – Reset Date: [–] (ix) Margin(s): [+/-][–] per cent. per annum (x) Minimum Rate of Interest: [Not Applicable] (xi) Maximum Rate of Interest: [Not Applicable] (xii) Day Count Fraction: [Actual/Actual ICMA] [Actual/Actual or Actual/Actual – ISDA] [Actual/365 Fixed] [Actual/360] [30/360 or 360/360 or bond basis] [30E/360 or Eurobond Basis][30E/360 (ISDA)] (xiii) Additional Business Centre(s): [–] (xiv) Fall back provisions, rounding [–] provisions, denominator and any other terms relating to the method of calculating interest on Floating Rate Bonds, if different from those set out in the Conditions: (xv) Relevant Financial Centre: [–] (xvi) Representative Amount: [–]
216
(xvii) Reference Banks: [if none specified, four major banks selected by Agent Bank/Calculation Agent] 18 Zero Coupon Bond Provisions: [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph) (i) Accrual Yield: [–] per cent. per annum (ii) Reference Price: [–] (iii) Any other formula/basis of [–] determining amount payable: (iv) Day Count Fraction in relation to [Condition 8(e)/specify other] Early Redemption Amounts and (Consider applicable day count fraction if not U.S. dollar late payment: denominated) 19 Indexed Bond Provisions: [Applicable/Not Applicable] (If not applicable, delete the remaining sub-paragraphs of this paragraph) (i) Index/Formula: [UK Retail Price Index] (ii) Interest Rate: [–] (iii) Party responsible for calculating the [Not Applicable/Calculation Agent] Rate(s) of Interest, Interest Amount and Redemption Amount(s) (if not the Agent Bank): (iv) Provisions for determining Coupon where calculated by reference to Index and/or Formula and/or other variable: (v) Determination Date: (vi) Provisions for determining Coupon Applicable – Condition 7(c) and 7(e) where calculation by reference to Index and/or Formula is impossible or impracticable or otherwise disrupted: (vii) Interest Payment Dates: [–] (viii) First Interest Payment Date: [–] (ix) Business Day Convention: [Following Business Day Convention/Modified Following Business Day Convention/Preceding Business Day Convention/other (give details)] (x) Business Centre: [–] (xi) Minimum Indexation Factor: [Not Applicable/specify] (xii) Maximum Indexation Factor: [Not Applicable/specify] (xiii) Limited Indexation Month(s): [–] (xiv) Reference Gilt: [–]
217
(xv) Day Count Fraction: [Actual/Actual ICMA] [Actual/Actual or Actual/Actual- ISDA] [Actual/365 Fixed] [Actual/360] [30/360 or 360/360 or bond basis] [30E/360 or Eurobond Basis][30E/360 (ISDA)] 20 Dual Currency Bond Provisions [Applicable/Not Applicable] [If not applicable, delete the remaining sub-paragraphs of this paragraph] (i) Rate of Exchange/method of [Give details] calculating Rate of Exchange: (ii) Party responsible for calculating the [Not Applicable/Calculation Agent] Rate(s) of Interest, Interest Amount and Redemption Amount(s) (if not the Agent Bank): (iii) Provisions applicable where [–] calculation by reference to Rate of Exchange impossible or impracticable: (iv) Person at whose option Specified [–] Currency(ies) is/are payable: PROVISIONS RELATING TO REDEMPTION 21 Issuer Call Option: Applicable in accordance with Condition 8(b)/Not Applicable (If not applicable, delete the remaining sub-paragraphs of this paragraph) (i) Optional Redemption Date(s): Any Interest Payment Date [falling on or after [–] and at a premium of [–] (delete for non-Floating Rate Bonds).] (ii) Optional Redemption Amount(s) [–] and method, if any, of calculation of such amount(s): (iii) If redeemable in part: Minimum Redemption Amount: [Not Applicable] [ [ ] per Calculation Amount] Maximum Redemption Amount: [Not Applicable] [ [ ] per Calculation Amount] (iv) Notice period (if other than as set [Not Applicable] out in the Conditions): 22 Final Redemption Amount: [Principal Amount Outstanding plus accrued but unpaid interest] GENERAL PROVISIONS APPLICABLE TO THE BONDS 23 Form of Bonds [Bearer/Registered] (i) If issued in Bearer form: [Temporary Global Bond exchangeable for a Permanent Global Bond which is exchangeable for Definitive Bonds on [–] days’ notice/at any time/in the limited circumstances specified in the Permanent Global Bond/for tax reasons.]
218
[Temporary Global Bond exchangeable for Definitive Bonds on [–] days’ notice.] (Permanent Global Bond exchangeable for Definitive Bonds on [–] days’ notice/at any time/in the limited circumstances specified in the Permanent Global Bond/for tax reasons.) (ii) If Registered Bonds: [Global Bond Certificate exchangeable for Individual Bond Certificates] 24 Relevant Financial Centre(s) or other [Not Applicable/give details.] [Note that this item relates special provisions relating to Payment to the date and place of payment, and not interest period Dates: end dates, to which items 16(iii), 17(iv) and 19(x) relate] 25 Talons for future Coupons or Receipts to be [Yes/No. If yes, give details] attached to Definitive Bonds (and dates on which such Talons mature): 26 Details relating to Partly Paid Bonds: [Not Applicable/give details] amount of each payment comprising the Issue Price and date on which each payment is to be made and consequences (if any) of failure to pay, including any right of the Issuer to forfeit the Bonds and interest due on late payment: 27 Details relating to Instalment Bonds: [Not Applicable/give details] (i) Instalment Date: [–] (ii) Instalment Amount: [–] 28 Redenomination, renominalisation and [Not Applicable/The provisions [in Condition 19/annexed reconventioning provisions: to this Final Terms] apply] 29 Consolidation provisions: [Not Applicable/The provisions annexed to this Final Terms] apply] 30 Other final terms: [Not Applicable/give details] (When adding any other final terms consideration should be given as to whether such terms constitute a “significant new factor” and consequently trigger the need for a supplement to the Prospectus under Article 16 of the Prospectus Directive.) 31 TEFRA rules: [TEFRA C/TEFRA D/Not Applicable] ISSUER/SWS LOAN TERMS 32 Interest rate on relevant Term [–] Advance/Index Linked Advances: 33 Term of relevant Term Advance/Index [–] Linked Advances: 34 Other relevant provisions: [–] DISTRIBUTION 35 (i) If syndicated, names of Managers: [Not Applicable/give names] (ii) Stabilising Manager (if any): [Not Applicable/give name]
219
36 If non-syndicated, name of Dealer: [Not Applicable/give name] 37 Additional selling restrictions: [Not Applicable/give details]
PURPOSE OF FINAL TERMS
These Final Terms comprise the final terms required for issue and admission to trading on the [specify relevant regulated market] the issue of Bonds described herein pursuant to the listing of the Programme for the issuance of Guaranteed Bonds financing Southern Water Services Limited.
RESPONSIBILITY
The Issuer and each Guarantor accept responsibility for the information contained in these Final Terms.
[The Financial Guarantor accepts responsibility for the [Financial Guarantor] Information contained in these Final Terms.]*
[(Relevant third party information) has been extracted from (specify source). [Each of the] [The] Issuer [and the Guarantor] confirms that such information has been accurately reproduced and that, so far as it is aware, and is able to ascertain from information published by (specify source), no facts have been omitted which would render the reproduced information inaccurate or misleading.]
Signed on behalf of the Issuer: By: Duly authorised Signed on behalf of Southern Water Services Limited: By: Duly authorised Signed on behalf of SWS Holdings Limited: By: Duly authorised Signed on behalf of SWS Group Holdings Limited: By: Duly authorised [Signed on behalf of [Financial Guarantor]] By: Duly authorised * Delete as applicable
220
PART B – OTHER INFORMATION
1 Listing (i) Listing: [London/Luxembourg/other (specify)/None] (ii) Admission to trading: [Application has been made for the Bonds to be admitted to trading on [–] with effect from [–]. [Not Applicable.] (iii) Estimate of total expenses related to [–] admission to trading: 2 Ratings Ratings: The Bonds to be issued have been rated: [S&P: [–]] [Moody’s: [–]] [Fitch: [–]] (The above disclosure should reflect the rating allocated to Bonds of the type being issued under the Programme generally or, where the issue has been specifically rated, that rating.) 3 [Notification The UK Listing Authority [has been requested to provide/has provided - include first alternative for an issue which is contemporaneous with the establishment or update of the Programme and the second alternative for subsequent issues] the [include names of competent authorities of host Member States] with a certificate of approval attesting that the Prospectus has been drawn up in accordance with the Prospectus Directive.] 4 [Interests of Natural and Legal Persons involved in the [Issue/Offer]] Need to include a description of any interest, including conflicting ones, that is material to the issue/offer, detailing the persons involved and the nature of the interest. May be satisfied by the inclusion of the following statement: “Save as discussed in [“Subscription and Sale”], so far as the Issuer is aware, no person involved in the offer of the Bonds has an interest material to the offer.” [(When adding any other description, consideration should be given as to whether such matters described constitute “significant new factors” and consequently trigger the need for a supplement to the Prospectus under Article 16 of the Prospectus Directive.)] 5 Reasons for the offer, estimated net proceeds and total expenses (i) [Reasons for the offer: [–] (See [“Use of Proceeds”] wording in Prospectus – if reasons for offer different from making profit and/or hedging certain risks will need to include those reasons here.)] (ii) [Estimated net proceeds: [–] (If proceeds are intended for more than one use will need to split out and present in order of priority. If proceeds insufficient to fund all proposed uses state amount and sources of other funding)]
221
(iii) [Estimated total expenses: [–] (Include breakdown of expenses.) (Only necessary to include disclosure of net proceeds and total expenses at (ii) and (iii) above where disclosure is included at (i) above).](1) 6 [Fixed Rate Bonds only – YIELD Indication of yield: [–] The yield is calculated at the Issue Date on the basis of the Issue Price. It is not an indication of future yield.] 7 [Floating Rate Bonds Only - HISTORIC INTEREST RATES Details of historic [LIBOR/EURIBOR/other] rates can be obtained from [Telerate].] 8 [Index-Linked or other variable-linked Bonds only – PERFORMANCE OF INDEX/FORMULA/OTHER VARIABLE AND OTHER INFORMATION CONCERNING THE UNDERLYING Need to include details of where past and future performance and volatility of the index/formula/other variable can be obtained. Where the underlying is an index need to include the name of the index and a description if composed by the Issuer and if the index is not composed by the Issuer need to include details of where the information about the index can be obtained. Where the underlying is not an index need to include equivalent information.](2) [(When completing this paragraph, consideration should be given as to whether such matters described constitute “significant new factors” and consequently trigger the need for a supplement to the Prospectus under Article 16 of the Prospectus Directive.)] 9 [Dual currency Bonds only – PERFORMANCE OF RATE[S] OF EXCHANGE Need to include details of where past and future performance and volatility of the relevant rate[s] can be obtained.](3) 10 Operational information ISIN Code: [–] Common Code: [–] Any clearing system(s) other than Euroclear [Not Applicable/give name(s) and member(s) [and Bank S.A./N.V. and Clearstream Banking address(es)] Société Anonyme and the relevant identification number(s): Delivery: Delivery [against/free of] payment Names and addresses of additional Paying [–] Agent(s) (if any): ______
Notes:
(1) Required for derivative securities
(2) Required for derivative securities
(3) Required for derivative securities
222
CHAPTER 9 USE OF PROCEEDS
The net proceeds from each issue of Bonds under the Programme will be on-lent to SWS under the terms of further Issuer/SWS Loan Agreements to be applied by SWS for its general corporate purposes or used to repay or service the Issuer’s Financial Indebtedness.
223
CHAPTER 10 DESCRIPTION OF HEDGE COUNTERPARTIES
DESCRIPTION OF RBS GROUP (the “RBS Group”)
General The Royal Bank of Scotland Group plc (“RBSG”) is the holding company of a large global banking and financial services group. Headquartered in Edinburgh, RBSG operates in the UK, the US and internationally through its two principal subsidiaries, The Royal Bank of Scotland plc (“RBS”) and National Westminster Bank Plc (“NatWest”). Both RBS and NatWest are major UK clearing banks whose origins go back over 275 years. RBSG has a large and diversified customer base and provides a wide range of products and services to personal, commercial and large corporate and institutional customers in over 50 countries.
RBSG’s operations are conducted principally through RBS and its subsidiaries (including NatWest) other than ABN AMRO businesses (see below) and the general insurance business (primarily Direct Line Group and Churchill Insurance).
The RBS Group had total assets of £2,401.7 billion and owners’ equity of £80.5 billion at 31 December 2008. The RBS Group’s capital ratios, which included the equity minority interest of Fortis and Santander in ABN AMRO were: a total capital ratio of 14.1 per cent., a Core Tier 1 capital ratio of 6.8 per cent. and a Tier 1 capital ratio of 10.0 per cent. as at 31 December 2008. The short-term unsecured and unguaranteed debt obligations of RBS are currently rated A-1 by S&P, P-1 by Moody’s and F1+ by Fitch. The long-term senior unsecured and unguaranteed debt obligations of RBS are currently rated A+ by S&P, Aa3 by Moody’s and AA- by Fitch.
ABN AMRO On 17 October 2007, RFS Holdings B.V. (“RFS Holdings”), a company jointly owned by RBSG, Fortis N.V., Fortis SA/NV, Fortis Bank Nederland (Holding) N.V., (Fortis N.V., Fortis SA/NV and Fortis Bank Nederland (Holding) N.V., collectively, “Fortis”) and Banco Santander S.A. (“Santander”) (the “Consortium Banks”) and controlled by RBSG, completed the acquisition of ABN AMRO Holding N.V. (“ABN AMRO”), a major international banking group with a leading position in international payments and a strong investment banking franchise with particular strengths in emerging markets, as well as a provider of a range of retail and commercial financial services around the world via regional business units in Europe, the Netherlands, North America, Latin America and Asia. RFS Holdings is in the process of implementing an orderly separation of the business units of ABN AMRO, with RBSG principally retaining ABN AMRO’s global wholesale businesses and international retail businesses in Asia and the Middle East. Certain other assets will continue to be shared by the Consortium Banks.
On 3 October 2008, the Dutch government acquired Fortis Bank Nederland (Holding) N.V. including Fortis’ participation in RFS Holdings that represents the acquired activities of ABN AMRO.
Board changes On 1 October 2008, Stephen Hester, John McFarlane and Arthur Ryan were appointed non-executive directors of RBSG. Johnny Cameron stepped down from the RBSG Board on 13 October 2008 and Mark Fisher stepped down as a director on 21 November 2008. Sir Fred Goodwin stepped down from the Board on 21 November 2008 and was replaced as RBS Group Chief Executive by Stephen Hester, who also became an executive director. Lawrence Fish retired as a non-executive director on 31 December 2008 and Sir Tom McKillop retired as Chairman on 3 February 2009. Sir Philip Hampton was appointed as a director and Deputy Chairman with effect from 19 January 2009 and assumed the chairmanship of the Board on 3
224
February 2009. In addition, Bob Scott, Jim Currie, Bill Friedrich, Charles ‘Bud’ Koch, Janis Kong, Steve Robson and Peter Sutherland retired on 6 February 2009.
In summary, as of 6 February 2009, and ahead of the appointment of three new non-executive directors to be completed with the approval of UK Financial Investments Limited, the Board of RBSG will comprise:
Chairman Sir Philip Hampton Group Chief Executive Mr Stephen Hester Group Finance Director Mr Guy Whittaker Chairman, Regional Markets Mr Gordon Pell Non-executive Directors Mr Colin Buchan Mr Archie Hunter Mr Joe MacHale Mr John McFarlane Mr Art Ryan
Recent Events On 8 October 2008, the Government announced measures intended, inter alia, to provide sufficient liquidity to the banking sector and to make available new capital to UK banks (including RBS).
Credit Guarantee Scheme Following its announcement on 8 October 2008 referred to above, on 13 October 2008 the Government announced a credit guarantee scheme for bank and building society debt issuance (the “Scheme”). RBS applied to take part in the Scheme and was named as an initial eligible institution in the “Rules of the 2008 Credit Guarantee Scheme” issued by The Commissioners of Her Majesty’s Treasury (“HM Treasury”) on 13 October 2008. Under the Scheme HM Treasury, at the request of RBS, will provide an unconditional and irrevocable direct guarantee which ensures timely payment of non-complex, senior and unsecured debt instruments issued by RBS of a term of not more than three years.
Capital Raising On 4 November 2008, RBSG announced a Placing and Open Offer of £15 billion at a fixed price of 65.5p per ordinary share. As a result, HM Treasury now own approximately 57.9 per cent. of the enlarged issued ordinary share capital of RBSG.
In addition, HM Treasury subscribed for £5 billion of non-cumulative preference shares in RBSG.
On 19 January 2009, the RBS Group announced that it had reached agreement with HM Treasury and UK Financial Investments to replace the £5 billion of preference shares it holds with new ordinary shares. The Offer of the new ordinary shares and the redemption of the preference shares are subject to shareholder approval. The Offer is expected to close in late March 2009.
On 15 December 2008 the RBS Group announced that it has exposure through trading and collateralised lending to funds of hedge funds invested with Bernard L Madoff Investment Securities LLC. If as a result of the alleged fraud the value of the assets of these hedge funds is nil, the RBS Group’s potential loss could amount to approximately £400 million.
On 19 December 2008, RBSG completed the sale of its 50% shareholding in Tesco Personal Finance (“TPF”) to its former joint venture partner, Tesco plc.
On 14 January 2009, the RBS Group announced that it had disposed of its 4.26% equity stake in Bank of China for a net consideration of £1.6 billion.
225
On 26 February 2009 the RBS Group announced that the full year 2008 results were an attributable loss, before write-down of goodwill and other intangible assets, of £7.9 billion. Write-down of goodwill and other intangible assets were £16.2 billion, net of tax.
In its capacity as Hedge Counterparty, RBS will be acting through its branch at 135 Bishopsgate, London, EC2M 3UR.
The information contained herein with respect to RBS and the RBS Group relates to and has been obtained from it. Delivery of this Prospectus shall not create any implication that there has been no change in the affairs of RBS or the RBS Group since the date hereof, or that the information contained or referred to herein is correct as of any time subsequent to its date.
CITIBANK, N.A., LONDON BRANCH Citibank, N.A. (“Citibank”) was originally organised on 16 June 1812, and Citibank now is a national banking association organised under the National Bank Act of 1864 of the United States. Citibank is an indirect wholly-owned subsidiary of Citigroup Inc. (“Citigroup”), a Delaware holding company. As of 30 September 2008, the total assets of Citibank and its consolidated subsidiaries represented approximately 59 per cent. of the total assets of Citigroup and its consolidated subsidiaries.
Citibank is a commercial bank that, along with its subsidiaries and affiliates, offers a wide range of banking and trust services to its customers throughout the United States and the world.
Citibank, N.A., London Branch was registered in the United Kingdom as a foreign company in July 1920. The principal offices of the London Branch are located at Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB, England. The London Branch is primarily regulated by The Financial Services Authority and operated in the United Kingdom as a fully authorised commercial banking institution offering a wide range of corporate banking products.
Citibank does not publish audited financial statements. However, Citigroup publishes audited financial statements that include data relevant to Citibank and its consolidated subsidiaries, including an audited balance sheet of Citibank and its consolidated subsidiaries. Citibank’s earnings may differ significantly from those of Citigroup. The activities carried on by subsidiaries of Citigroup other than Citibank and its subsidiaries generally include certain consumer lending activities in the United States (including the credit card business, some residential mortgage lending, and secured and unsecured personal loans) and certain overseas banking operations, as well as investment banking services and securities brokerage activities around the world.
The Quarterly Report on Form 10-Q of Citigroup and its subsidiaries for the quarter ended 30 September 2008 (the “September 2008 10Q”) sets forth certain data relative to the consolidated financial position of Citibank and its subsidiaries as of 30 September 2008 and 31 December 2007.
The Consolidated Balance Sheets of Citibank as of 31 December 2007 and as of 31 December 2006 are set forth on page 110 of the Annual Report on Form 10-K of Citigroup and its subsidiaries for the year ended 31 December 2007 and as of 30 September 2008 and 31 December 2007 are set forth on page 87 of the September 2008 10-Q. Consolidated Balance Sheets of Citibank subsequent to 30 September 2008 will be included in the Form 10-Q’s (quarterly) and Form 10-K’s (annually) subsequently filed by Citigroup with the Securities and Exchange Commission (the “SEC”), which will be filed not later than 40 days after the end of the calendar quarter or 60 days after the end of the calendar year to which the report relates, or on Form 8-K with respect to certain interim events. For further information regarding Citibank, reference is made to the September 2008 10-Q and to any subsequent reports on Forms 10-K, 10-Q or 8-K filed by Citibank with the SEC. Copies of such material may be obtained, upon payment of a duplicating fee, by writing to the SEC at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at (800) SEC-0330 for further information on the operation of the public reference rooms. In addition, such reports of Citigroup are available at the SEC website (http://www.sec.gov).
226
In addition, Citibank submits quarterly to the U.S. Office of the Comptroller of the Currency (the “Comptroller”) certain reports called “Consolidated Reports of Condition and Income for a Bank With Domestic and Foreign Offices” (“Call Reports”). The Call Reports are on file with and publicly available at the Comptroller’s offices at 250 E Street, S.W., Washington, D.C. 20219 and are also available on the website of the U.S. Federal Deposit Insurance Corporation of the United States (http://www.fdic.gov). Each Call Report consists of a Balance Sheet, Income Statement, Changes in Equity Capital and other supporting schedules at the end of and for the period to which the report relates. The Call Reports are prepared in accordance with the regulatory instructions issued by the U.S. Federal Financial Institutions Examination Council in the United States. While the Call Reports are supervisory and regulatory documents, not primarily accounting documents, and do not provide a complete range of financial disclosure about Citibank, the reports nevertheless provide important information concerning the financial condition and results of operation of Citibank.
Any of the above reports are available upon request, without charge, from Citi Document Services, by calling toll free at (877) 936-2737 (outside the United States at (716) 730-8055), by emailing a request to [email protected], or by writing to: Citi Document Services, 540 Crosspoint Parkway, Getzville, New York 14068.
For the avoidance of doubt, none of (i) the September 2008 10Q, (ii) the Annual Report on Form 10-K, (iii) Form 8-K, (iv) the Call Reports or any other reports referred to in the preceding paragraphs in relation to Citibank, N.A., London Branch are incorporated by reference into this Prospectus.
The obligations of Citibank, N.A., London Branch under any Hedging Agreement will not be guaranteed by Citigroup or by any other affiliate.
The information contained herein with respect to Citibank and Citigroup and their affiliates relates to and has been obtained from them.
227
CHAPTER 11 TAX CONSIDERATIONS
The following is a summary of the UK withholding taxation treatment in relation to payments of principal and interest in respect of the Bonds as at the date of this Prospectus and is not intended to be exhaustive. These comments do not deal with other UK tax aspects of acquiring, holding or disposing of Bonds and do not take into consideration any tax implications which may arise on substitution of the Issuer. They relate only to the position of persons who are unconnected with the Issuer and are the absolute beneficial owners of their Bonds and who hold their Bonds as investments. Some sections do not apply to certain classes of taxpayer (such as dealers). Prospective purchasers of Bonds should be aware that the particular terms of issue of any Sub-Class of Bonds as specified in the relevant Final Terms may affect the tax treatment of that and other Sub-Classes or Series of Bonds. This summary as it applies to UK taxation is based upon UK law and HM Revenue and Customs practice as in effect on the date of this Prospectus and is subject to any change in law or practice that may take effect after such date.
Bondholders who may be liable to taxation in respect of their acquisition, holding or disposal of Bonds are advised to consult their professional advisers as to whether they are so liable (and if so under the laws of which jurisdictions) and, if so liable, the basis of determining (including any method of calculating) their liability to tax with respect to the Bonds, since the following comments relate only to certain UK taxation aspects of payments in respect of the Bonds. In particular, Bondholders should be aware that they may be liable to taxation under the laws of other jurisdictions in relation to payments in respect of the Bonds even if such payments may be made without withholding or deduction for or on account of taxation under the laws of the UK.
Prospective purchasers who are in any doubt as to their tax position should consult their professional advisers.
UK Withholding Tax on UK source interest The Bonds issued by the Issuer will constitute “quoted Eurobonds” provided they are and continue to be listed on a recognised stock exchange within the meaning of Section 1005 of the Income Tax Act 2007. The London Stock Exchange is a recognised stock exchange for these purposes. Securities will be treated as listed on the London Stock Exchange if they are included in the Official List by the United Kingdom Listing Authority and are admitted to trading on the London Stock Exchange. HM Revenue and Customs have confirmed that securities that are admitted to trading on the Professional Securities Market satisfy the condition of being admitted to trading on the London Stock Exchange. While the Bonds are and continue to be quoted Eurobonds, payments of interest on the Bonds may be made without withholding or deduction for or on account of United Kingdom income tax.
Subject to “Payments by a Financial Guarantor under the Financial Guarantees” below, in all cases falling outside the exemption described above, interest on the Bonds will be paid under deduction of United Kingdom income tax at the basic rate (currently 20 per cent.) unless:
(i) when that interest is paid the company which makes the payment reasonably believes that the person beneficially entitled to the interest is:
(a) a company resident in the United Kingdom; or
(b) a company not resident in the United Kingdom which carries on a trade in the United Kingdom through a permanent establishment and which brings into account the interest in computing its United Kingdom taxable profits; or
228
(c) a partnership each member of which is a company referred to in (a) or (b) above or a combination of companies referred to in (a) or (b) above,
and HM Revenue & Customs has not given a direction that the interest should be paid under deduction of tax; or
(ii) the Issuer has received a direction to the contrary from HM Revenue & Customs in respect of such relief as may be available pursuant to the provisions of any applicable double taxation treaty.
However, this withholding will not apply if the relevant interest is paid on Bonds with a maturity of less than one year from the date of issue and which are not issued under arrangements the effect of which is to render such Bonds part of a borrowing with a total term of a year or more. If United Kingdom withholding tax is imposed, then the Issuer will not pay additional amounts in respect of the Bonds.
Provision of Information by United Kingdom Paying and Collecting Agents Bondholders in the United Kingdom (i) paying interest to or receiving interest on behalf of another person who is an individual, or (ii) paying amounts due on redemption of any Bonds which constitute deeply discounted securities as defined in chapter 8 of Part 4 of the Income Tax (Trading and Other Income) Act 2005 to or receiving such amounts on behalf of another person who is an individual, may be required to provide certain information to HM Revenue and Customs regarding the identity of the payee or person entitled to the interest and, in certain circumstances such information may be exchanged with tax authorities in other countries. However, in relation to amounts payable on the redemption of such Bonds HM Revenue & Customs published practice indicates that HM Revenue & Customs will not exercise its power to obtain information where such amounts are paid or received on or before 5 April 2009.
For the above purposes, “interest” should be taken, for practical purposes, as including payments made by the Financial Guarantor in respect of interest on Wrapped Bonds.
The provisions referred to above may also apply, in certain circumstances, to payments made on redemption of any Bonds where the amount payable on redemption is greater than the issue price of the Bonds.
Payments by a Financial Guarantor under the Financial Guarantees If a Financial Guarantor makes any payments in respect of interest on the Wrapped Bonds (or other amounts due under the Wrapped Bonds other than the repayment of amounts subscribed for such Bonds) such payments may be subject to United Kingdom withholding tax at the basic rate (currently 20 per cent) subject to such relief as may be available under the provisions of any applicable double taxation treaty. Such payments by a Financial Guarantor may not be eligible for any of the other exemptions described in “UK Withholding Tax on UK source interest” above. If UK withholding tax is imposed, then a Financial Guarantor will not pay any additional amounts under the Financial Guarantees.
Other Rules relating to United Kingdom Withholding Tax Bonds may be issued at an issue price of less than 100 per cent. of their principal amount. Any discount element on any such Bonds will not be subject to any United Kingdom withholding tax pursuant to the provisions mentioned in “UK Withholding Tax on UK source interest” above, but may be subject to reporting requirements as outlined in “Provision of Information by United Kingdom Paying and Collecting Agents” above.
Where Bonds are issued with a redemption premium, as opposed to being issued at a discount, then any element of such premium may constitute a payment of interest. Payments of interest are subject to United Kingdom withholding tax and reporting requirements as outlined above.
Where interest has been paid under deduction of United Kingdom income tax, Bondholders who are not resident in the United Kingdom may be able to recover all or part of the tax deducted if there is an appropriate provision in any applicable double taxation treaty.
229
The references to “interest” above mean “interest” as understood in UK tax law. The statements above do not take any account of any different definitions of “interest” or “principal” which may prevail under any other law or which may be created by the terms and conditions of the Bonds or any related documentation.
The above description of the United Kingdom withholding tax position assumes that there will be no substitution of the Issuer pursuant to Condition 15(d) (Substitution of the Issuer) of the Bonds and does not consider the tax consequences of any such substitution.
EU Savings Directive The EU has adopted a Directive regarding the taxation of savings income. The Directive requires Member States to provide to the tax authorities of another Member State details of payments of interest and other similar income paid by a person to an individual in another Member State, except that, Austria, Belgium and Luxembourg will instead impose a withholding system for a transitional period unless during such period they elect otherwise. A number of third countries and territories including Switzerland have adopted similar measures to the EU Directive.
Investors should note that the European Commission has announced proposals to amend the Directive. If implemented, the proposed amendments would, inter alia, extend the scope of the Directive to (i) payments made through certain intermediate structures (whether or not established in a Member State) for the ultimate benefit of an EU resident individual, and (ii) a wider range of income similar to interest.
Cayman Islands The Issuer has been incorporated under the laws of the Cayman Islands as an exempted company and, as such, the Issuer (which was incorporated under the name London 70 Limited) has obtained an undertaking from the Governor in Council of the Cayman Islands substantially in the following form:
“The Tax Concessions Law (1999 Revision) Undertaking as to Tax Concessions
In accordance with Section 6 of the Tax Concessions Law (1999 Revision), the Governor in Council undertakes with London 70 Limited (the “Company”):
(a) that no Law which is hereafter enacted in the islands imposing any tax to be levied on profits, income gains or appreciations shall apply to the Company or its operations; and
(b) in addition, that no tax to be levied on profits, income gains or appreciations or which is in the nature of estate duty or inheritance tax shall be payable:
(i) on or in respect of the shares debentures or other obligations of the Company; or
(ii) by way of the withholding in whole or in part of any relevant payment as defined in Section 6(3) the Tax Concessions Law (1999 Revision).
The concessions shall be for a period of twenty years from 4 September 2001.
Governor in Council”
230
CHAPTER 12 SUBSCRIPTION AND SALE
Dealership Agreement Bonds may be sold from time to time by the Issuer to any one or more of Citigroup Global Markets Limited, HSBC Bank plc, The Royal Bank of Scotland plc, and any other dealer appointed from time to time (the “Dealers”) or to subscribers from whom subscriptions have been procured by the Dealers, in each case pursuant to the amended and restated dealership agreement dated 27 February 2009 made between, amongst others, SWS, the Issuer, the Co-Arrangers and the Dealers (the “Dealership Agreement”). The arrangements under which a particular Sub-Class of Bonds may from time to time be agreed to be sold by the Issuer to, and purchased by, Dealers or subscribers are set out in the Dealership Agreement and the subscription agreements relating to each Sub-Class of Bonds. Any such agreement will, inter alia, make provision for the form and terms and conditions of the relevant Bonds, the price at which such Bonds will be purchased by the Dealers or subscribers and the commissions or other agreed deductibles (if any) payable or allowable by the Issuer in respect of such purchase. The Dealership Agreement makes provision for the resignation or termination of appointment of existing Dealers and for the appointment of additional or other Dealers either generally in respect of the Programme or in relation to a particular Series, Class or Sub-Class of Bonds.
In the Dealership Agreement, the Issuer, failing whom SWS, has each agreed to reimburse the Dealers for certain of their expenses in connection with the establishment and maintenance of the Programme and the issue of Bonds under the Dealership Agreement and each of the Obligors has agreed to indemnify the Dealers against certain liabilities incurred by them in connection therewith.
United States of America The Bonds and any guarantees in respect thereof have not been and will not be registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except in certain transactions exempt from the registration requirements of the Securities Act. Terms used in this paragraph have the meaning given to them in Regulation S.
Bearer Bonds are subject to U.S. tax law requirements and may not be offered, sold or delivered within the United States or its possessions or to a United States person, except in certain transactions permitted by U.S. tax regulations. Terms used in this paragraph have the meanings given to them by the U.S. Internal Revenue Code and regulations thereunder.
Each Dealer has agreed that, except as permitted by the Dealership Agreement, it will not offer, sell or deliver Bonds, (i) as part of their distribution at any time or (ii) otherwise until 40 days after the completion of the distribution of the Bonds comprising the relevant Sub-Class, as certified to the Principal Paying Agent or the Issuer by such Dealer (or, in the case of a sale of a Sub-Class of Bonds to or through more than one Dealer, by each of such Dealers as to the Bonds of such Sub-Class purchased by or through it, in which case the Principal Paying Agent or the Issuer shall notify each such Dealer when all such Dealers have so certified) within the United States or to, or for the account or benefit of, U.S. persons, and such Dealer will have sent to each Dealer to which it sells Bonds during the distribution compliance period a confirmation or other notice setting forth the restrictions on offers and sales of the Bonds within the United States or to, or for the account or benefit of, U.S. persons. Terms used in this paragraph have the meaning given to them in Regulation S.
In addition, until 40 days after the commencement of the offering of Bonds comprising any Sub-Class, any offer or sale of Bonds within the United States by any dealer (whether or not participating in the offering) may violate the registration requirements of the Securities Act.
Public Offer Selling Restrictions under the Prospectus Directive In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”), each Dealer has represented, warranted and agreed, and each
231
further Dealer appointed under the Programme will be required to represent, warrant and agree, that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the “Relevant Implementation Date”) it has not made and will not make an offer of Bonds which are the subject of the offering contemplated by this Prospectus as completed by the Final Terms in relation thereto to the public in that Relevant Member State except that it may, with effect from and including the Relevant Implementation Date, make an offer of Bonds to the public in that Relevant Member State:
(a) if the final terms in relation to the Bonds specify that an offer of those Bonds may be made other than pursuant to Article 3(2) of the Prospectus Directive in that Relevant Member State (a “Non-exempt Offer”), following the date of publication of a prospectus in relation to such Bonds which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, provided that any such prospectus has subsequently been completed by the final terms contemplating such Non-exempt Offer, in accordance with the Prospectus Directive, in the period beginning and ending on the dates specified in such prospectus or final terms, as applicable;
(b) at any time to legal entities which are authorised or regulated to operate in the financial markets or, if not so authorised or regulated, whose corporate purpose is solely to invest in securities;
(c) at any time to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts;
(d) at any time to fewer than 100 natural or legal persons (other than qualified investors as defined in the Prospectus Directive) subject to obtaining the prior consent of the relevant Dealer or Dealers nominated by the Issuer for any such offer; or
(e) at any time in any other circumstances falling within Article 3(2) of the Prospectus Directive,
provided that no such offer of Bonds referred to in (b) to (e) above shall require the Issuer or any Dealer to publish a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive.
For the purposes of this provision, the expression an “offer of Bonds to the public” in relation to any Bonds in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the Bonds to be offered so as to enable an investor to decide to purchase or subscribe the Bonds, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression “Prospectus Directive” means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.
United Kingdom Each Dealer has represented, warranted and agreed that:
(a) No deposit-taking: in relation to any Bonds having a maturity of less than one year:
(i) it is a person whose ordinary activities involve it in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of its business; and
(ii) it has not offered or sold and will not offer or sell any Bonds other than to persons:
(A) whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses; or
(B) who it is reasonable to expect will acquire, hold, manage or dispose of investments (as principal or agent) for the purposes of their businesses,
232
where the issue of the Bonds would otherwise constitute a contravention of Section 19 of the FSMA by the Issuer;
(b) Financial Promotion: it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the FSMA) received by it in connection with the issue or sale of any Bonds in circumstances in which section 21(1) of FSMA does not apply to the Issuer or the Guarantors; and
(c) General Compliance: it has complied and will comply with all applicable provisions of FSMA with respect to anything done by it in relation to any Bonds in, from or otherwise involving the United Kingdom.
Cayman Islands No invitation or solicitation will be made to the public in the Cayman Islands to subscribe for the Bonds.
General Save for obtaining the approval of the Prospectus by the UK Listing Authority in accordance with Part VI of the FSMA for the Bonds to be admitted to listing on the Official List of the UK Listing Authority and to trading on the Market or the PSM, no action has been or will be taken in any jurisdiction by the Issuer, the other Obligors or the Dealers that would permit a public offering of Bonds, or possession or distribution of the Prospectus or any other offering material, in any jurisdiction where the action for that purpose is required. Each Dealer shall to the best of its knowledge comply with all applicable laws, regulations and directives in each country or jurisdiction in or from which they purchase, offer, sell or deliver Bonds or have in their possession or distribute the Prospectus or any other offering material, in all cases at their own expense.
The Dealership Agreement provides that the Dealers shall not be bound by any of the restrictions relating to any specific country or jurisdiction (set out above) to the extent that such restrictions shall, as a result of change(s) in the official interpretation, after the date of the Dealership Agreement, of applicable laws and regulations, no longer be applicable but without prejudice to the obligations of the Dealers described in the paragraph above.
Selling restrictions may be supplemented or modified with the agreement of the Issuer. Any such supplement or modification will be set out in the relevant Final Terms (in the case of a supplement or modification relevant only to a particular Sub-Class of Bonds) or (in any other case) in a supplement to this Prospectus.
233
CHAPTER 13 GENERAL INFORMATION
Authorisation The establishment of the Programme and the issue of Bonds thereunder have been duly authorised by resolutions of the Board of Directors of the Issuer passed at a meeting of the Board held on 9 June 2003 (as approved by resolutions of SWI dated 9 June 2003) and at a meeting of the Board held on 15 July 2003 (as also approved by resolutions of SWI dated 15 July 2003 and SWS dated 15 July 2003). The update of the Programme and the issue of Bonds thereunder have been duly authorised by resolutions of the Board of Directors of the Issuer passed at a meeting of the Board held on 18 February 2009 (as approved by a written resolution executed by SWS as shareholder of the Issuer dated 18 February 2009). The Issuer has obtained or will obtain from time to time all necessary consents, approvals and authorisations in connection with the issue and performance of the Bonds.
The giving of the guarantees by each of SWS, SWSGH and SWSH has been duly authorised by resolutions of the Board of Directors of each of SWS, SWSGH and SWSH, respectively, dated 15 July 2003 and further resolutions of the committee of the Board of Directors of SWS dated 18 February 2009, further resolutions of the Board of Directors of SWSGH dated 18 February 2009, and further resolutions of the Board of Directors of SWSH dated 18 February 2009, respectively.
Listing of Bonds It is expected that each Sub-Class of Bonds which is to be admitted to the Official List and to trading on the Market or the PSM will be admitted separately as and when issued, subject only to the issue of a Global Bond or Bonds initially representing the Bonds of such Sub-Class. In the case of each Sub-Class of Wrapped Bonds, admission to the Official List and to trading on the Market or the PSM is subject to the issue of the relevant Financial Guarantee by the Financial Guarantor in respect of such Sub-Class. The listing of the Programme in respect of Bonds was granted on 23 July 2003, updated on 26 May 2005 and 13 October 2006 and is expected to be further updated on 27 February 2009.
However, Bonds may also be issued pursuant to the Programme which will not be listed on the Market or the PSM or any other Stock Exchange or which will be listed on such Stock Exchange as the Issuer and the relevant Dealer(s) may agree.
Documents Available For so long as the Programme remains in effect or any Bonds shall be outstanding, copies of the following documents may (when published) be inspected during normal business hours (in the case of Bearer Bonds) at the specified office of the Principal Paying Agent, (in the case of Registered Bonds) at the specified office of the Registrar and the Transfer Agents and (in all cases) at the registered office of the Bond Trustee:
(i) the Memorandum and Articles of Association of each of the Issuer and the other Obligors;
(ii) the audited financial statements of SWS for the years ended 31 March 2007 and 31 March 2008;
(iii) the unaudited financial statements of SWS for the six months ended 30 September 2008;
(iv) the audited financial statements of SWSGH for the years ended 31 March 2007 and 31 March 2008;
(v) the audited financial statements of SWSH for the years ended 31 March 2007 and 31 March 2008;
(vi) the audited financial statements of the Issuer for the years ended 31 March 2007 and 31 March 2008;
(vii) a copy of this Prospectus;
(viii) a copy of an offering circular dated 17 July 2003 in respect of the Programme;
(ix) a copy of an offering circular dated 24 May 2005 in respect of the Programme;
234
(x) a copy of a prospectus dated 13 October 2006 in respect of the Programme (as supplemented by a supplemental prospectus dated 12 July 2007);
(xi) each Final Terms relating to Bonds which are admitted to listing, trading and/or quotation by any listing authority, stock exchange and/or quotation system. (In the case of any Bonds which are not admitted to listing, trading and/or quotation by any listing authority, stock exchange and/or quotation system, copies of the relevant Final Terms will only be available for inspection by the relevant Bondholders);
(xii) each Investors’ Report;
(xiii) each Financial Guarantee relating to each Sub-Class of Wrapped Bonds issued under the Programme;
(xiv) each G&R Deed;
(xv) each Issuer/SWS Loan Agreement;
(xvi) the Common Terms Agreement;
(xvii) the Registered Office Agreement;
(xviii) the Master Definitions Agreement;
(xix) the STID;
(xx) the Indemnification Deeds;
(xxi) the Security Agreement;
(xxii) the Bond Trust Deed;
(xxiii) each DSR Liquidity Facility Agreement;
(xxiv) each O&M Reserve Facility Agreement (if any);
(xxv) each Hedging Agreement;
(xxvi) the Account Bank Agreement;
(xxvii) the Agency Agreement;
(xxviii) the Tax Deeds of Covenant;
(xxix) the Initial Term Facility Agreement, the Initial RCF Agreement, the Second Revolving Credit Facility Agreement and the Second Artesian Term Facility Agreement;
(xxx) the Senior Mezzanine Facility Agreement and the Junior Mezzanine Facility Agreement; and
(xxxi) the SWS/SWSG Loan Agreement and related security document.
This Prospectus can also be viewed on the website of the Regulatory News Service operated by the London Stock Exchange at http://www.londonstockexchange.com/en-gb/pricesnews/marketnews/.
Clearing Systems The Bonds have been accepted for clearance through Euroclear and Clearstream, Luxembourg. The appropriate Common Code and ISIN for each Sub-Class of Bonds allocated by Euroclear and Clearstream, Luxembourg will be specified in the applicable Final Terms. If the Bonds are to clear through an additional or alternative clearing system, the appropriate information will be specified in the applicable Final Terms.
The address of Euroclear is 1 Boulevard du Roi Albert II, B-1210 Brussels, Belgium and the address of Clearstream, Luxembourg is 42 Avenue JF Kennedy L-1855 Luxembourg. The address of any alternative clearing system will be specified in the applicable Final Terms.
235
Significant or Material Change There has been no significant change in the financial or trading position and no material adverse change in the financial position or prospects of either the Issuer (or its subsidiaries, if any), SWSH (or its subsidiaries) or SWSGH (or its subsidiaries), each since 31 March 2008. There has been no significant change in the financial or trading position of SWS (or its subsidiaries) since 30 September 2008 and no material adverse change in the financial position or prospects of SWS (or its subsidiaries) since 31 March 2008.
Litigation Save as disclosed in Chapter 4 “Description of the SWS Financing Group” under “Litigation/Actions” of this Prospectus, none of the Issuer or its subsidiaries (if any), SWSGH or its subsidiaries, SWSH or its subsidiaries or SWS or its subsidiaries is or has been involved in any governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the relevant Obligor is aware) during the 12 months preceding the date of this Prospectus which may have or have had in the recent past significant effects on the financial position or profitability of the Issuer or its subsidiaries (if any), SWSGH or its subsidiaries, SWSH or its subsidiaries or SWS or its subsidiaries, respectively.
Availability of Financial Statements The audited annual financial statements of the Issuer and the audited annual financial statements of SWS will be prepared as of 31 March in each year. The Issuer has not published and does not intend to publish any interim financial statements, but SWS intends to publish semi-annual unaudited financial statements. The unaudited interim financial statements of SWS will be prepared as of 30 September in each year. All future audited annual financial statements (and any published interim financial statements) of SWS and the audited annual financial statements of the Issuer will be available free of charge in accordance with “Documents Available” - see paragraphs (v) and (viii) above.
Auditors The auditors of SWS are PricewaterhouseCoopers LLP (as successor entity to PricewaterhouseCoopers and authorised and regulated by the Financial Services Authority for designated investment business), chartered accountants, of 1 Embankment Place, London, WC2N 6RH who have audited SWS’ accounts, without qualification, in accordance with generally accepted auditing standards in the United Kingdom for each of the two financial years ended on 31 March 2007 and 31 March 2008.
PricewaterhouseCoopers LLP, chartered accountants, have audited, without qualification, the regulatory financial information of SWS in accordance with generally accepted auditing standards in the United Kingdom for each of the two financial years ended on 31 March 2007 and 31 March 2008.
PricewaterhouseCoopers LLP, chartered accountants, of 1 Embankment Place, London, WC2N 6RH have audited, without qualification, the financial statements of the Issuer in accordance with generally accepted auditing standards in the United Kingdom for each of the two financial years ended on 31 March 2007 and 31 March 2008.
The auditors of SWSGH are PricewaterhouseCoopers LLP, chartered accountants, of 1 Embankment Place, London, WC2N 6RH who have audited SWSGH’s accounts, without qualification, in accordance with generally accepted auditing standards in the United Kingdom for each of the two financial years ended on 31 March 2007 and 31 March 2008.
The auditors of SWSH are PricewaterhouseCoopers LLP, chartered accountants, of 1 Embankment Place, London, WC2N 6RH who have audited SWSH’s accounts, without qualification, in accordance with generally accepted auditing standards in the United Kingdom for each of the two financial years ended on 31 March 2007 and 31 March 2008.
Each report of PricewaterhouseCoopers LLP that is referred to above was produced at the request of the company to which it related.
236
Bond Trustee’s reliance on reports and legal opinions Certain of the reports of accountants and other experts to be provided in connection with the Programme and/or the issue of Bonds thereunder may be provided on terms whereby they contain a limit on the liability of such accountants or other experts.
Under the terms of the Programme, the Bond Trustee will not necessarily receive a legal opinion in connection with each issue of Bonds.
Legend Bonds, Receipts, Talons and Coupons appertaining thereto will bear a legend substantially to the following effect: “Any United States person who holds this obligation will be subject to limitations under the United States income tax laws, including the limitations provided in Sections 165(j) and 1287(a) of the Internal Revenue Code.” The sections referred to in such legend provide that a United States person who holds a Bond, Coupon, Receipt or Talon generally will not be allowed to deduct any loss realised on the sale, exchange or redemption of such Bond, Coupon, Receipt or Talon and any gain (which might otherwise be characterised as capital gain) recognised on such sale, exchange or redemption will be treated as ordinary income.
Information in respect of the Bonds The issue price and the amount of the relevant Bonds will be determined, before filing of the relevant Final Terms of each Tranche, based on then prevailing market conditions. The Issuer does not intend to provide any post-issuance information in relation to any issues of Bonds.
Material Contracts SWS has not entered into contracts outside the ordinary course of the its business, which could result in SWS or any member of its group being under an obligation or entitlement that is material to SWS’s ability to meet its obligation to holders of Bonds in respect of the Bonds being issued.
237
INDEX OF DEFINED TERMS
The following terms are used throughout this Prospectus
“1999 Periodic Review” means the Periodic Review for the period 1 April 2000 to 31 March 2005. “2004 Periodic Review” means the Periodic Review for the period 1 April 2005 to 31 March 2010. “2009 Periodic Review” means the Periodic Review to be carried out by Ofwat for the period 1 April 2010 to 31 March 2015. “A Category” means a credit rating of at least A- from S&P, A3 from Moody’s or A- from Fitch. “Acceleration of Liabilities” or means an acceleration of any Secured Liabilities or termination of “Acceleration” a commitment (or equivalent action) including: (a) the delivery of a termination notice from a Finance Lessor or SWS terminating the leasing of Equipment under a Finance Lease; (b) the delivery of a notice by SWS or a Finance Lessor requesting the prepayment of any Rentals under a Finance Lease; (c) the early termination of any hedging obligations (whether by reason of an event of default, termination event or other right of early termination) under a Hedging Agreement; or (d) the taking of any other steps to recover any payment due in respect of any Secured Liabilities, which have matured for repayment and are overdue, by a Secured Creditor or Secured Creditors pursuant to the terms of the applicable Finance Documents and in accordance with the STID, and “acceleration” and “accelerate” will be construed accordingly. “Accession Memorandum” means (a) with respect to the STID, each memorandum entered into or to be entered into pursuant to Clause 2 (Accession) or Clause 19 (Benefit of Deed) (as applicable) of the STID and (b), with respect to the Bond Trust Deed, a memorandum in substantially the form set out in Schedule 5 to the Bond Trust Deed pursuant to which a Financial Guarantor accedes to the Bond Trust Deed. “Account” means any bank account of any Obligor. “Account Bank” means National Westminster Bank Plc or any successor account bank appointed pursuant to the Account Bank Agreement. “Account Bank Agreement” means the account bank agreement dated the Initial Issue Date (as amended and/or supplemented from time to time) between, among others, the Obligors, the Standstill Cash Manager, the Account Bank and the Security Trustee. “Additional Secured Creditor” means any person not already a Secured Creditor which becomes a Secured Creditor pursuant to the provisions of the STID.
238
“Adjusted Lease Reserve Amount” means, in respect of any Finance Lease and from the commencement of a Standstill in any 12 month period commencing on 1 April in any year, the relevant portion of the Annual Finance Charge for such 12 month period relating to such Finance Lease as calculated pursuant to Paragraph 5.10 of Schedule 12 (Cash Management) of the CTA. “Advance” means any advance or other credit accommodation provided under any Authorised Credit Facility. “Affiliate” means a Subsidiary or a Holding Company of a person or any other Subsidiary of that Holding Company (other than in any Hedging Agreement when used in relation to a Hedge Counterparty, where “Affiliate” has the meaning given to it in that Hedging Agreement). “Agency Agreement” means the agreement dated the Initial Issue Date (as amended and/or supplemented from time to time) between the Issuer, SWS and the Agents referred to therein under which, among other things, the Principal Paying Agent is appointed as issuing agent, principal paying agent and agent bank for the purposes of the Programme. “Agent” means the Agent Bank, the Principal Paying Agent, the Registrar, the Transfer Agent and any Paying Agent or any other agent appointed by the Issuer pursuant to the Agency Agreement or a Calculation Agency Agreement. “Agent Bank” means Deutsche Bank AG London (or any successor thereto) in its capacity as agent bank under the Agency Agreement in respect of the Bonds. “AMP” means an asset management plan submitted by SWS to the economic regulator in respect of a five-year period. “AMP Period” means a five year period in relation to which an asset management plan is submitted by SWS to the economic regulator, and in this respect “AMP2 Period” means the AMP Period commencing on 1 April 1995; “AMP3 Period” means the AMP Period commencing on 1 April 2000; “AMP4 Period” means the AMP Period commencing on 1 April 2005; “AMP5 Period” means the AMP Period commencing on 1 April 2010; and “AMP6 Period” means the AMP Period commencing on 1 April 2015. “AMP2” means the asset management plan prepared for the AMP2 Period. “AMP3” means the asset management plan prepared for the AMP3 Period. “AMP4” means the asset management plan prepared for the AMP4 Period. “AMP5” means the asset management plan prepared for the AMP5 Period “AMP6” means the asset management plan prepared for the AMP6 Period “Ancillary Documents” means the valuations, reports, legal opinions, tax opinions, accountants’ reports and the like addressed to or given for the benefit of the Security Trustee, any Obligor or any Secured Creditor in respect of the Security Assets. “Annual Finance Charge” means, in respect of each 12 month period commencing 1 April in
239
any subsequent year, the aggregate of all interest due or to become due (after taking account of the impact on interest rates of any Hedging Agreements then in place) during that 12 month period on the Class A Debt and the Class B Debt (including, for the avoidance of doubt, all interest due on Class B Debt but not yet payable as a result of the restrictions imposed upon the payment of that indebtedness contained in the Finance Documents), any Financial Guarantee Fee payable to any Financial Guarantor within that 12 month period, all fees and commissions payable to each Finance Party within that 12 month period and the Lease Reserve Amounts and Adjusted Lease Reserve Amounts falling due in that 12 month period, excluding all indexation of principal, all costs incurred in raising such debt, amortisation of the costs of issue of such debt in that 12 month period and all other costs incurred in connection with the raising of such debt) less all interest received or, in respect of forward-looking ratios, receivable by any member of the SWS Financing Group from a third party during such period (except any interest received or receivable from SWSG under the SWS/SWSG Loan Agreement). “Applicable Accounting Principles” means accounting principles, standards and practices generally accepted in the United Kingdom as applied from time to time and making such adjustments (if any) as the directors of the relevant company may consider appropriate arising out of changes to applicable accounting principles or otherwise from time to time. “Appointed Business” means the appointed business of a “relevant undertaker” (as that term is defined by the WIA). “Artesian” means Artesian Finance plc. “Artesian II” means Artesian Finance II plc. “Associate” means: (a) any person who has a Controlling interest in any member of the SWS Financing Group; (b) any person who directly or indirectly holds at least 15 per cent. or more of the voting share capital in any member of the SWS Financing Group; (c) any person who is Controlled by a member of the SWS Financing Group; or (d) any person in which a member of the SWS Financing Group holds directly or indirectly at least 15 per cent. or more of the voting share capital, and in each case, any Affiliate of such person. “Auditors” means PricewaterhouseCoopers LLP or such other firm of accountants of international repute as may be appointed by SWS in accordance with the CTA as the Auditors for the SWS Financing Group. “Authorised Credit Facility” means any facility or agreement entered into by the Issuer or SWS for Class A Debt or Class B Debt or Subordinated Debt as
240
permitted by the terms of the CTA or for the issue of Financial Guarantees in relation thereto, the providers of which have acceded to the STID and the CTA, and includes the Liquidity Facilities, the Initial RCF Agreement, the Second Revolving Credit Facility, the Initial Term Facility Agreement, the Issuer/SWS Loan Agreements, the Bonds, the Hedging Agreements, the Financial Guarantee Fee Letters, the G&R Deeds, the Mezzanine Facility Agreements, the Second Artesian Term Facility Agreement and any other document entered into in connection with the foregoing facilities or agreements or the transactions contemplated in the foregoing facilities or agreements (excluding, however, the Dealership Agreement and the Common Agreements). “Authorised Credit Provider” means a lender or other provider of credit or financial accommodation under any Authorised Credit Facility and includes each Financial Guarantor for so long as any Financial Guarantee issued by that Financial Guarantor is outstanding, and each Bondholder. “Authorised Investments” means: (a) securities issued by the government of the United Kingdom; (b) demand or time deposits, certificates of deposit and short- term unsecured debt obligations, including commercial paper, provided that the issuing entity or, if such investment is guaranteed, the guaranteeing entity, is rated the Minimum Short-term Rating; (c) any other obligations provided that in each case the relevant investment has the Minimum Short-term Rating and is either denominated in pounds sterling or (following the date on which the UK becomes a Participating Member State) euro or has been hedged in accordance with the Hedging Policy; or (d) any money market funds or equivalent investments which have a rating of at least AAA by S&P or V-1+ by Fitch or Aaa by Moody’s. “Authorised Signatory” means any person who is duly authorised by any Obligor or any Party and in respect of whom a certificate has been provided signed by a director of that Obligor or such Party setting out the name and signature of that person and confirming such person’s authority to act. “Base Cash Flows” means the annual cash flows of the amount of costs netted off against the amount of receipts and savings in respect of each Relevant Change of Circumstance. Notified Item and relevant disposal of land (as defined in the Licence). “Base Currency” means pounds sterling. “Base Prospectus” has the meaning given to that term under the “Important Notice” above.
241
“Bearer Bonds” means those of the Bonds which are in bearer form. “Bond Trust Deed” means the bond trust deed dated the Initial Issue Date (and as amended and/or supplemented from time to time) between, among others, the Issuer, the Initial Financial Guarantors and the Bond Trustee, under which Series 1 Bonds, Series 2 Bonds, Series 3 Bonds and Series 4 Bonds are constituted and any further Bonds will, on issue, be constituted and any bond trust deed supplemental thereto. “Bond Trustee” means Deutsche Trustee Company Limited or any successor trustee appointed pursuant to the Bond Trust Deed for and on behalf of the relevant Bondholders. “Bond Trustee Reserved Matters” means those matters set out in Part B (Bond Trustee Reserved Matters) of Schedule 3 of the STID and Chapter 7 “Summary of the Financing Agreements” under “Security Trust and Intercreditor Deed” of this Prospectus. “Bondholders” means the holders from time to time of the Bonds. “Bonds” means the Class A Bonds and/or the Class B Bonds, as the context may require, and “Bond” shall be construed accordingly. “Bridge Facility Agreement” means the £1,900,000,000 credit agreement dated 8 March 2002, as amended from time to time, between, among others, the Issuer as original borrower and original guarantor and The Royal Bank of Scotland plc as arranger, agent and security trustee under which the relevant lenders made advances that funded the First Aqua Acquisition and funded SWS’ working capital requirements and general corporate expenditure. All amounts payable by the SWS Financing Group to the lenders under such credit agreement have been discharged in full. “BSI” means the British Standards Institution. “Business” means Appointed Business and Permitted Non-Appointed Business or otherwise as permitted under the Finance Documents. “Business Day” means (other than in any Hedging Agreement where “Business Day” has the meaning given to it in that Hedging Agreement): (a) in relation to any sum payable in euro, a TARGET Settlement Day and a day on which commercial banks and foreign exchange markets settle payments generally in London and each (if any) additional city or cities specified in the relevant Final Terms; (b) in relation to any sum payable in a currency other than euro, a day on which commercial banks and foreign exchange markets settle payments generally in London, in the principal financial centre of the currency in which such financial indebtedness is denominated (which in the case of a payment in U.S. dollars shall be New York) and in each (if any) additional city or cities specified in the relevant Final Terms; and
242
(c) in relation to the definition of Lease Calculation Date, a day on which commercial banks and foreign exchange markets settle payments generally in London. “Calculation Agency Agreement” means, in relation to the Bonds of any Tranche, an agreement in or substantially in the form of Schedule 1 of the Agency Agreement. “Calculation Agent” means, in relation to any Tranche of Bonds, the person appointed as calculation agent in relation to such Tranche of Bonds by the Issuer pursuant to the provisions of a Calculation Agency Agreement (or any other agreement) and shall include any successor calculation agent appointed in respect of such Tranche of Bonds. “Calculation Date” means (other than in any Hedging Agreement where “Calculation Date” has the meaning given to it in that Hedging Agreement), 31 March and 30 September in each year starting on 30 September 2003 or any other calculation date agreed as a result of a change in the financial year end date of any Obligor. “Capex Contract” means any agreement pursuant to which SWS outsources any investment, construction works and other Capital Expenditure. “Capex Reserve Account” means the account of SWS titled “Capex Reserve Account” held at the Account Bank and includes any sub-account relating to that account and any replacement account from time to time. “Capital Expenditure” means Capital Maintenance Expenditure and any investment expenditure (net of associated grants and contributions) incurred (or, in respect of any future period, forecast to be incurred in the SWS Business Financial Model) relating to increases in capacity or enhancement of service levels, quality or security of supply. “Capital Maintenance Expenditure” means investment expenditure (net of associated grants and contributions) incurred (or, in respect of any future period, forecast to be incurred in the SWS Business Financial Model) on maintaining base service levels in the Appointed Business but excluding any investment expenditure relating to increases in capacity or enhancement of service levels, quality or security of supply. “Cash Expenses” means the aggregate of all expenses including capital expenditure incurred by SWS in any period (excluding depreciation, IRC and interest on Financial Indebtedness). “Cash Manager” means The Royal Bank of Scotland plc during a Standstill Period in its capacity as Standstill Cash Manager under the CTA, or any successor Standstill Cash Manager, and at all other times SWS. “CAT” means the Competition Appeal Tribunal of the United Kingdom. “CC” or “Competition Commission” means the United Kingdom Competition Commission. “CCD” means expenditure designated under the heading “current cost depreciation” in the financial projections contained in the supplementary report issued by Ofwat detailing the numbers and assumptions specific to SWS in the Director General’s most recent Final Determination adjusted as appropriate for any subsequent
243
IDOK and for Out-turn Inflation provided that for the purposes of calculating any financial ratio for any Test Period for which there is no Final Determination, “CCD” shall be SWS’ good faith, honestly held present estimate of such expenditure for such Test Period. “CCW” means the Consumer Council for Water. “Class” means each class of Bonds, the available Classes of Bonds being Class A Wrapped Bonds, Class A Unwrapped Bonds, Class B Wrapped Bonds and Class B Unwrapped Bonds. “Class A Adjusted ICR” means, in respect of a Test Period, the ratio of Net Cash Flow less the aggregate of CCD and IRC during such Test Period to Class A Debt Interest during such Test Period. “Class A Average Adjusted ICR” means the sum of the ratios of Net Cash Flow less the aggregate of CCD and IRC to Class A Debt Interest for each of the Test Periods comprised in a Rolling Average Period comprised in a Rolling Average divided by three. “Class A Bonds” means the Class A Wrapped Bonds and the Class A Unwrapped Bonds. “Class A Debt” means any financial accommodation that is, for the purposes of the STID, to be treated as Class A Debt and includes all debt outstanding under: (a) the Class A Wrapped Bonds and the Class A Unwrapped Bonds (if any) issued by the Issuer on or after the Initial Issue Date; (b) each Initial Authorised Credit Facility Agreement, the Second Artesian Term Facility Agreement and the Second Revolving Credit Facility; (c) all Interest Rate Hedging Agreements and the Currency Hedging Agreements in relation to Class A Debt; (d) the DSR Liquidity Facility and any O&M Reserve Facility entered into after the Initial Issue Date; (e) the Financial Guarantee Fee Letters; and (f) each G&R Deed in respect of Class A Wrapped Debt. “Class A Debt Instructing Group” or means a group of representatives (each a “Class A DIG “Class A DIG” Representative”) of Qualifying Class A Debt, comprising: (a) in respect of each Sub-Class of Class A Wrapped Bonds or other Class A Wrapped Debt (if no FG Event of Default has occurred and is continuing in respect of the Financial Guarantor of those Bonds), the Financial Guarantor of such Sub-Class of Class A Wrapped Bonds or other Class A Wrapped Debt;
244
(b) in respect of each Sub-Class of Class A Wrapped Bonds (after an FG Event of Default has occurred and is continuing in respect of the Financial Guarantor of those Bonds) and each Sub-Class of Class A Unwrapped Bonds, the Bond Trustee; (c) in respect of the Initial RCF Agreement, the Initial RCF Agent and, in respect of the Initial Term Facility, Artesian II and, in respect of the Second Artesian Term Facility, Financial Security Assurance (U.K.) Limited; and (d) in respect of any other Secured Liabilities of the type referred to in paragraphs (a) to (c) above (excluding liabilities under all Interest Rate Hedging Agreements and under Currency Hedging Agreements in respect of the Class A Debt and under the Liquidity Facilities) or (with the approval of the Majority Creditors) other types of Secured Liabilities that rank pari passu with all other Class A Debt, the relevant representative appointed under the terms of the relevant Finance Document and named in the relevant Accession Memorandum or the STID as the Class A DIG Representative. each of which provides an appropriate indemnity to the Security Trustee each time it votes irrespective of whether it is a Majority Creditor. “Class A Debt Interest” means, in relation to any Test Period, and without double counting, an amount equal to the aggregate of: (a) all interest paid, due but unpaid or, in respect of forward- looking ratios, payable, on the Issuer’s and/or SWS’ obligations under or in connection with all Class A Debt and any Financial Indebtedness which falls under paragraph (e) of Permitted Financial Indebtedness; (b) all fees paid, due but unpaid or, in respect of forward- looking ratios, payable, to any Financial Guarantor of Class A Debt; and (c) Adjusted Lease Reserve Amounts or Lease Reserve Amounts paid, due but unpaid or, in respect of forward- looking ratios, payable, on the Issuer’s and/or SWS’ obligations under and in connection with all Class A Debt, in each case during such Test Period (after taking account of the impact on interest rates of all related Hedging Agreements then in force) (excluding all indexation of principal, amortisation of the costs of issue of any Class A Debt and/or Class B Debt within such Test Period and all other costs incurred in connection with the raising of such Class A Debt and/or Class B Debt) less all interest received or in respect of forward-looking ratios receivable by any member of the SWS Financing Group from a third party during such period (excluding any interest received or receivable by SWS under the SWS/SWSG Loan Agreement).
245
“Class A Debt Provider” means a provider of, or Financial Guarantor of, Class A Debt. “Class A ICR” means, in respect of a Test Period, the ratio of Net Cash Flow for such Test Period to Class A Debt Interest for such Test Period. “Class A Net Indebtedness” means, as at any date, all the Issuer’s and SWS’ nominal debt outstanding (or, in respect of a future date, forecast to be outstanding) under and in connection with any Class A Debt on such date and the nominal amount of any Financial Indebtedness falling within paragraph (e) of Permitted Financial Indebtedness which is outstanding (or, in respect of a future date, forecast to be outstanding) on such date including all indexation accrued on any such liabilities which are indexed together with any interest due but unpaid up to and including such date (after taking account of the effect of any relevant Interest Rate Hedging Agreements then in force) and less the value of all Authorised Investments and other amounts standing to the credit of any Account (other than an amount equal to the Excluded Insurance Proceeds Amount and an amount equal to the aggregate of any amounts which represent Customer Rebates or Distributions which have been declared but not paid on such date); where such debt is denominated other than in pounds sterling, the nominal amount outstanding will be calculated (I) in respect of debt with associated Currency Hedging Agreements, by reference to the applicable hedge rates specified in the relevant Currency Hedging Agreements; (ii) in respect of debt with no. associated Currency Hedging Agreements, by reference to the Exchange Rate on such date). “Class A RAR” means, on any Calculation Date, the ratio of Class A Net Indebtedness to RCV as at such Calculation Date or, in the case of any forward-looking ratios for Test Periods ending after such Calculation Date, as at the 31 March falling in such Test Period. “Class A Required Balance” means, on any Payment Date, the following 12 months’ interest forecast to be due on the Class A Debt. “Class A Unwrapped Bonds” means the Class A Bonds that do not have the benefit of a guarantee from a Financial Guarantor. “Class A Unwrapped Debt” means Class A Debt that does not have the benefit of a guarantee from a Financial Guarantor. “Class A Wrapped Bonds” means the Class A Bonds that have the benefit of a guarantee from a Financial Guarantor. “Class A Wrapped Debt” means Class A Debt that has the benefit of a guarantee from a Financial Guarantor. “Class A1 Preference Shares” means the fixed dividend (£40 per share net) cumulative redeemable preference shares 2038 of £1 each in the capital of SWS. “Class A2 Preference Shares” means the cumulative participating redeemable preference shares 2038 of 1p each in the capital of SWS. “Class B Bonds” means the Class B Wrapped Bonds and the Class B Unwrapped Bonds.
246
“Class B Debt” means any financial accommodation that is, for the purposes of the STID, to be treated as Class B Debt and includes all debt outstanding under the Class B Bonds and all Currency Hedging Agreements in relation to Class B Debt. “Class B Debt Instructing Group” or means a group of representatives (each a “Class B DIG “Class B DIG” Representative”) of Qualifying Class B Debt, comprising: (a) in respect of each Sub-Class of Class B Wrapped Bonds (if no FG Event of Default has occurred and is continuing in respect of the Financial Guarantor of those Bonds), the Financial Guarantor of such Sub-Class of Class B Wrapped Bonds; (b) in respect of each Sub-Class of Class B Wrapped Bonds (after an FG Event of Default has occurred and is continuing in respect of the Financial Guarantor of those Bonds) and each Sub-Class of Class B Unwrapped Bonds, the Bond Trustee; (c) in respect of any other Secured Liabilities of the type referred to in paragraphs (a) to (b) above (excluding liabilities under the Currency Hedging Agreements in relation to Class B Debt) or (with the approval of the Majority Creditors) other types of Secured Liabilities that rank pari passu with all other Class B Debt, the relevant representative appointed under the terms of the relevant Finance Document and named in the relevant Accession Memorandum as the Class B DIG Representative, each of which provides an appropriate indemnity to the Security Trustee each time it votes irrespective of whether it is a Majority Creditor. “Class B Debt Provider” means any provider of, or Financial Guarantor of, Class B Debt. “Class B Preference Shares” means the fixed dividend (£70 per share net) cumulative redeemable preference shares 2038 of £1 each in the capital of SWS. “Class B Required Balance” means, on any Payment Date, the next 12 months’ interest forecast to be due on the Class B Debt. “Class B Unwrapped Bonds” means the Class B Bonds that do not have the benefit of a guarantee from a Financial Guarantor. “Class B Unwrapped Debt” means Class B Debt that does not have the benefit of a guarantee from a Financial Guarantor. “Class B Wrapped Bonds” means the Class B Bonds that have the benefit of a guarantee from a Financial Guarantor. “Class B Wrapped Debt” means Class B Debt that has the benefit of a guarantee from a Financial Guarantor. “Clearstream, Luxembourg” means Clearstream Banking, société anonyme. “Co-Arrangers” means The Royal Bank of Scotland plc and Citigroup Global Markets Limited, the co-arrangers of the Programme.
247
“Common Agreements” means the Security Documents, the Bond Trust Deed, the Common Terms Agreement, the Master Definitions Agreement, the Account Bank Agreement, the CP Agreement, the Tax Deeds of Covenants, the SWS/SWSG Loan Agreement, the SWSG Security Agreement, the SWS Preference Share Deed, the Calculation Agency Agreement and any Finance Document to which no Secured Creditor other than the Security Trustee and/or the Issuer and/or any Agent is a party. “Common Terms Agreement” or means the common terms agreement entered into on the Initial “CTA” Issue Date between, among others, the Obligors, the Initial Financial Guarantors and the Security Trustee, and which contains certain representations and covenants of the Obligors and Events of Default. “Companies Act 1985” means the United Kingdom Companies Act 1985, as amended or re-enacted from time to time. “Competition Act” means the United Kingdom Competition Act 1998. “Competition Commission” or “CC” means the United Kingdom Competition Commission. “Compliance Certificate” means a certificate, substantially in the form of Schedule 10 (Form of Compliance Certificate) of the CTA in which each of the Issuer and SWS, periodically, provides certain financial statements to the Security Trustee and each Rating Agency as required by the CTA. “Conditions” means the terms and conditions of the Bonds set out in the Bond Trust Deed as may from time to time be amended, modified, varied or supplemented in the manner permitted under the STID. “Construction Output Price Index” means the index issued by the Department of Trade and Industry, varied from time to time, relating to price levels of new build construction based on a combination of logged values of tender price indices, labour and materials cost indices and on the value of new construction orders in the United Kingdom. “Contractor” means any person (being either a single entity, consortium or joint venture) that is a counterparty to an Outsourcing Agreement or Capex Contract. “Control” of one person by another person means that the other (whether directly or indirectly and whether by the ownership of share capital, the possession of voting power, contract or otherwise) and whether acting alone or in concert with another or others has the power to appoint and/or remove the majority of the members of the governing body of that person or otherwise controls or has the power to control the affairs and policies of that person (and references to “Controlled” and “Controlling” shall be construed accordingly). “Coupon” means an interest coupon appertaining to a Definitive Bond (other than a Zero Coupon Bond) and includes, where applicable, the Talon(s) appertaining thereto and any replacements for Coupons and Talons issued pursuant to Condition 14 (Replacement of Bonds, Coupons, Receipts and Talons).
248
“Couponholders” means the several persons who are for the time being holders of the Coupons and includes, where applicable, the Talonholders. “Court” means the High Court of England and Wales. “CP Agreement” means the conditions precedent agreement dated the Initial Issue Date (as amended from time to time) between, among others, the Bond Trustee, the Security Trustee and the Obligors. “CSP” means the Company Stakeholder Plan for SWS employees. “Currency Hedging Agreement” means any Hedging Agreement with a Hedge Counterparty in respect of a currency exchange transaction. “Customer Rebates” means, in respect of any Financial Year, an amount equal to the difference between the total revenue that is projected by SWS to be raised during such Financial Year on the basis of the announced charges and the revenue that would have accrued if SWS had established prices at the full price cap available to it under the Instrument of Appointment. “Date Prior” means, at any time, the date which is one day before the next Periodic Review Effective Date. “Dealers” means Citigroup Global Markets Limited, HSBC Bank plc, The Royal Bank of Scotland plc and any other entity which the Issuer and the other Obligors may appoint as a Dealer and notice of whose appointment has been given to the Principal Paying Agent and the Bond Trustee by the Issuer in accordance with the provisions of the Dealership Agreement but excluding any entity whose appointment has been terminated in accordance with the provisions of the Dealership Agreement and notice of such termination has been given to the Principal Paying Agent and the Bond Trustee by the Issuer in accordance with the provisions of the Dealership Agreement and references to a “relevant Dealer” or the “relevant Dealer(s)” mean, in relation to any Tranche of Bonds, the Dealer or Dealers with whom the Issuer has agreed the issue of the Bonds of such Tranche and “Dealer” means any one of them. “Dealership Agreement” means the amended and restated agreement dated on or about the date of this Prospectus between the Issuer, the Obligors and the Dealers named therein (or deemed named therein) concerning the purchase of Bonds to be issued pursuant to the Programme together with any agreement for the time being in force amending, replacing, novating or modifying such agreement and any accession letters and/or agreements supplemental thereto. “Debt Instructing Group” or “DIG” means the Class A DIG or, following the repayment in full of the Class A Debt, the Class B DIG “Debt Service Payment Account” means the account of the Issuer titled “Debt Service Payment Account” held at the Account Bank and includes any sub-account relating to that account and any replacement account from time to time. “Debt Service Reserve Account” means the account of the Issuer titled “Debt Service Reserve Account” held at the Account Bank and includes any sub-account
249
relating to that account and any replacement account from time to time. “Default” means (a) an Event of Default; (b) a Trigger Event; or (c) a Potential Event of Default. “Default Situation” means any period during which there subsists: (a) a Standstill Period; or (b) an Event of Default. “Definitive Bond” means a Bearer Bond in definitive form issued or, as the case may require, to be issued by the Issuer in accordance with the provisions of the Dealership Agreement or any other agreement between the Issuer and the relevant Dealer(s), the Agency Agreement and the Bond Trust Deed in exchange for either a Temporary Global Bond or part thereof or a Permanent Global Bond (all as indicated in the applicable Final Terms), such Bearer Bond in definitive form being in the form or substantially in the form set out in Schedule 2, Part C to the Bond Trust Deed and having the Conditions endorsed thereon and having the relevant information supplementing, replacing or modifying the Conditions appearing in the applicable Final Terms endorsed thereon or attached thereto and (except in the case of a Zero Coupon Bond in bearer form) having Coupons and, where appropriate, Receipts and/or Talons attached thereto on issue. “DEFRA” means the United Kingdom Department for the Environment, Food and Rural Affairs. “Determination Date” means the date which is seven Business Days prior to each Payment Date. “DETR” means the Department of the Environment, Transport and the Regions which had responsibility for the Environment prior to DEFRA. “DGWS” or “Director General” means the Director General of Water Services appointed under Section 1 of the WIA. “DIG Directions Request” means a written notice of each DIG Proposal sent by the Security Trustee to the relevant DIG Representatives pursuant to the STID. “DIG Proposal” means a proposal pursuant to the STID requiring a Majority Creditor decision in relation to the resignation of the Security Trustee or any vote to terminate or extend Standstill in accordance with the STID. “DIG Representatives” means the Class A DIG Representative, or the Class B DIG Representative, or the Senior Mezzanine Facility Agent or the Junior Mezzanine Facility Agent as the context requires, and “DIG Representative” means any of them. “Directors” means the Board of Directors for the time being of the Issuer or, as the case may be, the relevant Obligor. “Discharge Date” means the date on which all obligations of the Issuer and SWS under the Finance Documents have been irrevocably satisfied in full and no further obligations are capable of arising under the
250
Finance Documents. “Distribution” means, other than in respect of payments under the SWS Preference Shares or Subordinated Debt, any payments (including any payments of distributions, dividends, bonus issues, return of capital, fees, interest, principal or other amounts whatsoever) (by way of loan or repayment of any loan or otherwise) (in cash or in kind) to any Associate other than: (a) payments made to such persons pursuant to arrangements entered into for the provision of management and know- how services and which are entered into on bona fide arm’s length terms in the ordinary and usual course of trading to the extent that the aggregate of all such payments does not exceed £10,000,000 (indexed) in any consecutive 12 month period; or (b) any payments made to such persons pursuant to any Outsourcing Agreements and/or Capex Contracts which were entered into and remain in compliance with the Outsourcing Policy save that if any Outsourcing Agreement and/or Capex Contract should cease to comply with the Outsourcing Policy, all payments thereunder made by SWS shall only be made as Distributions where such non- compliance has remained unremedied for a period in excess of 365 days from the date on which SWS became aware of such non-compliance; or (c) payments made to such persons pursuant to arrangements entered into on terms that are not bona fide and arm’s length in the ordinary and usual course of trading to the extent that the aggregate of all such payments does not exceed £500,000 (indexed) in any consecutive 12 month period; or (d) payments to The Royal Bank of Scotland plc under or in relation to any Authorised Credit Facility, the Account Bank Agreement or the CTA or in relation to the making by SWS or the Issuer of any Authorised Investments. “Draft Business Plan” means the SWS draft business plan for the AMP5 Period submitted to Ofwat. “Drought Order” means Emergency Drought Order or Ordinary Drought Order as the case may be. “Drought Permit” means a permit granted by the EA that allows a Regulated Company to take water from new sources, or to increase the amount of water taken from existing sources. “DSR Liquidity Facility” means a debt service reserve liquidity facility made available under a DSR Liquidity Facility Agreement. “DSR Liquidity Facility Agreement” means any agreement establishing a DSR Liquidity Facility. “DSR Liquidity Facility Provider” means The Royal Bank of Scotland plc, or any other lender under a DSR Liquidity Facility Agreement.
251
“Dual Currency Bonds” means a Bond in respect of which the amount payable (whether in respect of principal or interest and whether at maturity or otherwise) will be made in such currencies, and based on such rates of exchange, as the Issuer and the relevant Dealer may agree. “DWI” means the United Kingdom Drinking Water Inspectorate. “EA” means the United Kingdom Environment Agency. “Early Redemption Amount” has the meaning, in relation to a Sub-Class of Bonds, given to such term in the Conditions relating to such Sub-Class of Bonds. “EIN Signatories” means the DIG Representatives representing 66 per cent. or more of the aggregate Outstanding Principal Amount of the Qualifying Class A Debt (or following the repayment in full of the Class A Debt, the Qualifying Class B Debt) after excluding the Qualifying Debt in respect of which the Bond Trustee is the DIG Representative and in respect of which the Bond Trustee in its absolute discretion has not voted. “Emergency” means the disruption of the normal service of the provision of water or wastewater services which is treated as an emergency under SWS’ policies, standards and procedures for emergency planning manual (EMPROC) (as amended from time to time). “Emergency Instruction Notice” means a notice setting out the written instructions of the EIN Signatories given to the Security Trustee after (in the case of a STID Proposal) the date specified in the STID Directions Request, being not less than 10 Business Days or (in the case of a DIG Proposal) the date specified in the DIG Directions Request being not less than five Business Days after the date that the STID Directions Request or DIG Directions Request (as applicable) is deemed to be given in accordance with Clause 17.3 (Effectiveness) of the Common Terms Agreement. “Emergency Instruction Procedure” means an emergency instruction procedure provided for in the Intercreditor Arrangements, subject to Entrenched Rights and Reserved Matters, to cater for circumstances when a Default Situation is subsisting, and certain decisions and instructions may be required in a timeframe which does not allow the Bond Trustee to convene Bondholder meetings. “Emergency Drought Order” means an order granted by DEFRA that allows a Regulated Company to limit usage “for such purposes as it thinks fit”, and to set up standpipes or water tanks to provide water during rota cuts. “Enforcement Action” means any step (other than the exercise of any rights of inspection of any asset or other immaterial actions taken under any Finance Lease) that a Secured Creditor is entitled to take to enforce its rights against an Obligor under a Finance Document following the occurrence of an Event of Default including, the declaration of an Event of Default, the institution of proceedings, the making of a demand for payment under a Guarantee, the making of a demand for cash collateral under a Guarantee or the Acceleration of Liabilities (other than a Permitted Lease Termination or a Permitted Hedge Termination) by a Secured Creditor or Secured
252
Creditors pursuant to the terms of the applicable Finance Documents. “Enforcement Order” means an enforcement order, a final enforcement order or a provisional enforcement order, each as referred to and defined in the WIA. “Enterprise Act” means the Enterprise Act 2002. “Entrenched Rights” means the rights of the Secured Creditors provided by the terms of Clauses 8.3 to 8.9 (inclusive) of the STID and reproduced in Chapter 7 “Summary of the Financing Agreements” under “Security Trust and Intercreditor Deed” of this Prospectus. “Entrenched Rights or Reserved means a notice sent by a Secured Creditor (or, where applicable, Matters Notice” its Secured Creditor Representative) in response to a STID Directions Request certifying that the consent of such Secured Creditor (or, where applicable, its Secured Creditor Representative) to implementation of the STID Proposal, in relation to which the STID Directions Request is given, is required. “Environmental Approvals” means any permit, licence, consent, approval or other authorisation and the filing of any notification, report or assessment required under any Environmental Law for the operation of the Business conducted on or from the properties owned or used by SWS. “Environmental Claim” means any claim, proceeding, formal notice or investigation by any person pursuant to any Environmental Law. “Environmental Law” means any applicable law (including DETR Circular 02/2000) in force in any jurisdiction in which SWS or any of its Subsidiaries or any Joint Venture in which it has an interest conducts business which relates to the pollution or protection of the environment or harm to or the protection of human health or the health of animals or plants. “Environmental Permits” or shall, in ether case where used, mean any permit, licence, consent, “Environmental Approvals” approval or other authorisation and the filing of any notification, report or assessment required under any Environmental Law for the operation of the Business conducted on or from the properties owned or used by SWS. “EPA” means the United Kingdom Environmental Protection Act 1990. “Equipment” means, in relation to a Finance Lease, any items of equipment, plant and/or machinery, system, asset, software licence, Intellectual Property Right, software and any other item leased under that Finance Lease. “Equivalent Amount” means the amount in question expressed in the terms of the Base Currency, calculated on the basis of the Exchange Rate. “EU” means the European Union. “Euro” means the single currency introduced at the start of the third stage of the European Economic and Monetary Union pursuant to the Treaty establishing the European Community, as amended, from time to time.
253
“Euroclear” means Euroclear Bank S.A./N.V. “Event of Default” means (other than in any Hedging Agreement when used in relation to a Hedge Counterparty, where “Event of Default” has the meaning given to it in that Hedging Agreement) an event specified as such in Schedule 7 of the CTA (Events of Default) as more particularly described in Chapter 7 “Summary of the Financing Agreements” under “Security Trust and Intercreditor Deed” of this Prospectus. “Exchange Rate” means the spot rate at which the Non-Base Currency is converted to the Base Currency as quoted by the Agent Bank as at 11.00 a.m.: (a) for the purposes of Clause 9.3 (Notice to Secured Creditors of STID Proposal) and Clause 9.6 (DIG Directions Request) of the STID, respectively, on the date that the STID Proposal or DIG Proposal (as applicable) is dated; and (b) in any other case, on the date as of which calculation of the Equivalent Amount of the Outstanding Principal Amount is required, and, in each case, as notified by the Agent Bank to the Security Trustee. “Excluded Accounts” means the Issuer’s O&M Reserve Account and Debt Service Reserve Account to the extent the balance standing to the credit of such accounts is attributable to a Standby Drawing under the relevant Liquidity Facility. “Excluded Agreement” has the meaning set out in the MDA. “Excluded Insurance Proceeds means, at any date, the aggregate of all proceeds of insurance Amount” received by SWS to cover the capital cost of reinstatement of assets which have not been applied by SWS in accordance with paragraph 6.5 of Schedule 12 (Cash Management) to the CTA; provided that if such aggregate is an amount less than £5,000,000 (indexed) then the “Excluded Insurance Proceeds Amount” on such date shall be zero. “Existing Hedging Agreements” means the interest rate transactions entered into by the Issuer with the Initial Hedge Counterparties on or prior to the Initial Issue Date, as amended from time to time. “Existing DSR Liquidity Facility” means the DSR Liquidity Facility currently made available under the Existing DSR Liquidity Facility Agreement. “Existing DSR Liquidity Facility means the DSR Liquidity Facility Agreement dated 23 July 2003 Agreement” between, among others, the Issuer and the Existing DSR Liquidity Facility Providers (as renewed from time to time). “Existing DSR Liquidity Facility means The Royal Bank of Scotland plc and Barclays Bank plc or Providers” their respective successors. “Extraordinary Resolution” means a resolution passed by a meeting of Bondholders, duly convened and held in accordance with the Bond Trust Deed, by a majority of not less than three-quarters of the votes cast at such
254
meeting. “Facility Agent” means any facility agent under any Authorised Credit Facility. “FG Event of Default” means (A) in relation to each of MBIA Assurance S.A. and MBIA UK: (a) any Guaranteed Amount which is Due for Payment (each as defined under the relevant Financial Guarantee) is unpaid by reason of non-payment by the Issuer and is not paid by such Financial Guarantor on the date stipulated in the relevant Financial Guarantee; (b) such Financial Guarantor disclaims, disaffirms, repudiates and/or challenges the validity of any of its obligations under the relevant Financial Guarantee or seeks to do so; (c) such Financial Guarantor: (i) presents any petition, commences any case or takes any proceedings for the winding-up or the appointment of an administrator or receiver (including as administrative receiver or manager), conciliator, trustee, assignee, custodian, sequestrator, liquidator or similar official under any Bankruptcy Law, of such Financial Guarantor (or as the case may be, of a material part of its property or assets) under any Bankruptcy Law; (ii) makes or enters into any general assignment, composition, arrangement (including a voluntary arrangement under the Insolvency Act 1986) or compromise with or for the benefit of any of its creditors; (iii) has a final and non-appealable order for relief entered against it under any Bankruptcy Law; or (iv) has a final and non-appealable order, judgment or decree of a court of competent jurisdiction entered against it appointing any conciliator, receiver, administrative receiver, trustee, assignee, custodian, sequestrator, liquidator, administrator or similar official under any Bankruptcy Law (each a “Custodian”) for such Financial Guarantor or all or any material portion of its property or authorising the taking of its possession by a Custodian of such Financial Guarantor. (B) In relation to FSA UK only, means the occurrence of the following: (a) any amount which is due for payment by FSA UK under the relevant Financial Guarantee is not paid on the due date; (b) FSA UK disclaims, disaffirms, repudiates and/or challenges the validity of any of its obligations under the
255
relevant Financial Guarantee or seeks to do so; (c) (i) a court of competent jurisdiction enters a final and non- appealable order, judgment or decree for relief under any Insolvency Law in any applicable jurisdiction against FSA UK; (ii) an encumbrancer takes possession of a material part of FSA UK’s property or assets; or (iii) the appointment of an administrator or receiver (including an administrative receiver or manager), conciliator, trustee, assignee, custodian, sequestrator, liquidator or similar official under any Insolvency Law, of FSA UK (or as the case may be, of a material part of its property or assets); (d) FSA UK: (i) presents any petition or takes any formal steps or proceedings for the winding-up, or the appointment of an administrator or receiver (including an administrative receiver or manager), conciliator, trustee, assignee, custodian, sequestrator, liquidator or similar official under any Insolvency Law, of FSA UK (or, as the case may be, of a material part of its property or assets); (ii) makes or enters into any general assignment, composition, arrangement (including, a voluntary arrangement under Part I of the Insolvency Act 1986) or compromise with or for the benefit of any of its creditors; (iii) becomes unable to pay its debts within the meaning of section 123(2) or section 123(1)(e) of such Insolvency Act or admits in writing its inability, or fails generally, to pay its debts as they become due; or (e) at any time it is or becomes unlawful for FSA UK to perform or comply with any part of all of its obligations under the relevant Financial Guarantee or any of its obligations thereunder are not or cease to be legal, valid or binding. (C) in relation to any other Financial Guarantor, such events as are specified in that Financial Guarantor’s G&R Deed or equivalent document and, in relation to Wrapped Bonds, set out in the relevant Final Terms. For the purpose of this definition, “Bankruptcy Law” means (i) in relation to MBIA Assurance S.A. only, articles L260-1 et seq. and L611-1 et seq. of the French Commercial Code, any similar or future federal or state bankruptcy, insolvency, reorganisation, moratorium, rehabilitation, fraudulent conveyance or similar law, statute or regulation of the French Republic or of any other applicable jurisdiction for the relief of debtors and (ii) in relation to MBIA UK only, any applicable United Kingdom bankruptcy or insolvency law, including the Enterprise Act 2002, the Insolvency
256
Act 2000, the Insolvency Act 1986, the Insolvency Rules 1986, the Insolvency Regulations 1994 or any legislation passed in substitution or replacement thereof or amendment thereof or similar law, statute or regulation for the relief of debtors of the United Kingdom or any other applicable jurisdiction. For the purpose of this definition and in relation to FSA UK only, “Insolvency Law” means any applicable United Kingdom bankruptcy or insolvency law, including the Enterprise Act 2002, the Insolvency Act 2000, the Insolvency Act 1986, the Insolvency Rules 1986, the Insolvency Regulations 1994 or any legislation passed in substitution, replacement or supplement thereof or amendment thereof or similar law, statute or regulation for the relief of debtors of the United Kingdom or any other applicable jurisdiction. “FG Excepted Amounts” means any additional amounts relating to premium, prepayment or acceleration, accelerated amounts and Subordinated Coupon Amounts. “Fifth Issue Date” means 17 July 2007. “Fifth Issuer/SWS Loan Agreement” means the loan agreement entered between the Issuer and SWS on 17 July 2007. “Final Business Plan” means the SWS final business plan for the AMP5 Period to be submitted to Ofwat. “Final Determination” means the final price determination made by the Director General on a five-yearly basis. “Final Terms” means the Final Terms issued in relation to each Tranche or Sub- Class of Bonds as a supplement to the Conditions and giving details of the Tranche or Sub-Class. “Finance Documents” means: (a) the Security Documents; (b) the Bond Trust Deed; (c) the Bonds (including the applicable Final Terms); (d) the Financial Guarantees; (e) the G&R Deeds; (f) the Financial Guarantee Fee Letters; (g) the Finance Lease Documents; (h) the Hedging Agreements; (i) the Common Terms Agreement; (j) the Issuer/SWS Loan Agreements; (k) the Initial RCF Facility Agreement; (l) the Second Revolving Credit Facility Agreement; (m) the Initial Term Facility Agreement; (n) the Second Artesian Term Facility Agreement; (o) the Liquidity Facility Agreements;
257
(p) the Agency Agreement; (q) the Mezzanine Facility Agreements; (r) the Master Definitions Agreement; (s) the Account Bank Agreement; (t) the CP Agreement; (u) any other Authorised Credit Facilities; (v) the Tax Deeds of Covenant; (w) the Indemnification Deeds; (x) the SWS/SWSG Loan Agreement and any related security document; (y) SWS Preference Share Deed; and (z) each agreement or other instrument between SWS or the Issuer (as applicable) and an Additional Secured Creditor designated as a Finance Document by SWS or the Issuer (as applicable), the Security Trustee and such Additional Secured Creditor in the Accession Memorandum for such Additional Secured Creditor. “Finance Lease Documents” means each Finance Lease together with any related or ancillary documentation. “Finance Leases” means any finance lease entered into by SWS or the Issuer in respect of plant, machinery, software, computer systems or equipment (the counterparty to which has acceded to the terms of the STID and the CTA) permitted to be entered into under the terms of the CTA, each a “Finance Lease”. “Finance Lessors” means any person entering into a Finance Lease with SWS, as permitted by the CTA and the STID, who accedes to the STID and the CTA as a Finance Lessor (each a “Finance Lessor”). “Finance Party” means any person providing financial accommodation pursuant to an Authorised Credit Facility including all arrangers, agents and trustees appointed in connection with any such Authorised Credit Facility. “Financial Guarantee Fee” means any fees payable to the Financial Guarantor under a Financial Guarantee Fee Letter. “Financial Guarantee Fee Letter” means any letter or other agreement between a Financial Guarantor and one or more of the Obligors setting the terms on which premia are payable in relation to one or more Financial Guarantees issued or to be issued by that Financial Guarantor and includes the MBIA Financial Guarantee Fee Letter. “Financial Guarantees” means any financial guarantee issued by a Financial Guarantor in respect of any Wrapped Debt and includes the Initial Financial Guarantees and “Financial Guarantee” shall be construed accordingly. “Financial Guarantor” means any person, including the Initial Financial Guarantors, which provides a financial guarantee, including the Financial Guarantees, in respect of any of the Wrapped Debt, and
258
“Financial Guarantors” means all of them if there is more than one at any time. “Financial Indebtedness” means (without double-counting) any indebtedness for or in respect of: (a) moneys borrowed or raised (whether or not for cash); (b) any documentary or standby letter of credit facility; (c) any acceptance credit; (d) any bond, note, debenture, loan stock or other similar instrument; (e) any finance or capital lease or hire purchase contract which would, in accordance with Applicable Accounting Principles, be treated as such; (f) any amount raised pursuant to any issue of shares which are capable of redemption; (g) receivables sold or discounted (other than on a non- recourse basis to any member of the SWS Financing Group); (h) the amount of any liability in respect of any advance or deferred purchase agreement if either one of the primary reasons for entering into such agreement is to raise finance or the relevant payment is advanced or deferred for a period in excess of 90 days; (i) any termination amount due from any member of the SWS Financing Group in respect of any Treasury Transaction that has terminated; (j) any other transaction (including any forward sale or purchase agreement) which has the commercial effect of a borrowing (other than any trade credit or indemnity granted in the ordinary course of SWS’ trading and upon terms usual for such trade); (k) any counter-indemnity obligation in respect of any guarantee, indemnity, bond, letter of credit or any other instrument issued by a bank or financial institution; and (l) any guarantee, indemnity or similar assurance against financial loss of any person in respect of any item referred to in paragraphs (a) to (k) above (other than any guarantee or indemnity in respect of obligations owed by one member of the SWS Financing Group to another). “Financial Statements” means, at any time, the financial statements of an Obligor, consolidated where applicable, most recently delivered to the Security Trustee. “Financial Year” means the 12 months ending on the 31 March in each year or such other period as may be approved by the Security Trustee. “First Aqua Acquisition” means the acquisition of Southern Water (NR) Limited and its subsidiaries (including SWS) from Scottish Power UK plc in April
259
2002. “Fitch” means Fitch Ratings Limited and any successor to the rating agency business of Fitch Ratings Limited. “Fixed Rate Bond” means a Bond on which interest is calculated at a fixed rate payable in arrear on a fixed date or fixed dates in each year and on redemption or on such other dates as may be agreed between the Issuer and the relevant Dealer(s) (as indicated in the applicable Final Terms). “Floating Rate Bond” means a Bond on which interest is calculated at a floating rate payable in arrear in respect of such period or on such date(s) as may be agreed between the Issuer and the relevant Dealer(s) (as indicated in the applicable Final Terms). “Form of Transfer” means the form of transfer endorsed on an Individual Bond Certificate in the form or substantially in the form set out in Schedule 3, Part B to the Bond Trust Deed. “Fourth Issue Date” means 18 October 2006. “Fourth Issuer/SWS Loan means the loan agreement entered into between the Issuer and Agreement” SWS on 18 October 2006. “FSA UK” means Financial Security Assurance (U.K.) Limited. “FSMA” means the Financial Services and Markets Act 2000, as amended. “G&R Deed” means a guarantee and reimbursement deed (or agreement of similar name and effect) between, among others, the Issuer and a Financial Guarantor in connection with a particular Sub-Class of Class A Wrapped Bonds and/or Class B Wrapped Bonds or any other Class A Wrapped Debt. “GAAP” means Generally Accepted Accounting Principles. “Global Bond” means a Temporary Global Bond and/or a Permanent Global Bond, as the context may require. “Global Bond Certificate” means a Registered Bond in global form in the form or substantially in the form set out in Part A of the Third Schedule to the Bond Trust Deed with such modifications (if any) as may be agreed between the Issuer, the Principal Paying Agent, the Bond Trustee and the relevant Dealer(s), together with the copy of each applicable Final Terms annexed thereto, comprising some or all of the Registered Bonds of the same Sub-Class sold outside the United States or to non-U.S. persons in reliance on Regulation S under the Securities Act, issued by the Issuer pursuant to the Dealership Agreement or any other agreement between the Issuer and the relevant Dealers(s) relating to the Programme, the Agency Agreement and the Bond Trust Deed. “Good Industry Practice” means the standards, practices, methods and procedures as practised in the United Kingdom conforming to all applicable laws and the degree of skill, diligence, prudence and foresight which would reasonably be expected from a skilled and experienced person undertaking all or part of the Business as the case may be, under the same or similar circumstances having regard to the
260
regulatory pricing allowances and practices in the United Kingdom’s regulated water and sewerage industry at the relevant time. “Government” means the government of the United Kingdom. “Greensands Companies” means Greensands Investments Limited, Greensands Senior Finance Limited, Greensands Junior Finance Limited, Greensands (UK) Limited and Greensands Europe Limited, all incorporated in England and Wales, and Greensands Holdings. “Greensands Holdings” means Greensands Holdings Limited, incorporated in Jersey. “Greensands Group” means Greensands Holdings Limited and its Subsidiaries, excluding the SWS Financing Group. “Group” means Southern Water Investments Limited and its Subsidiaries. “Guarantee” means, in relation to each Obligor, the guarantee of such Obligor given by it pursuant to the Security Document to which it is a party. “Guarantors” means SWSH, SWSGH, SWS and the Issuer, each a “Guarantor”. “Hedge Counterparties” means (i) the Initial Hedge Counterparties and (ii) any counterparty to a Hedging Agreement which is or becomes party to the STID in accordance with the STID and “Hedge Counterparty” means any of such parties. “Hedging Agreement” means: (a) any Treasury Transaction entered or to be entered into by the Issuer with Hedge Counterparties in accordance with the Hedging Policy (the counterparties to which have acceded to the terms of the STID and the CTA and agreed to be bound by the terms of certain provisions of Schedule 8 (Hedging Policy and Overriding Provisions Relating to Hedging Agreements) to the CTA); (b) any other Treasury Transaction (the counterparties to which have acceded to the terms of the STID and the CTA and agreed to be bound by the terms of certain provisions of Schedule 8 (Hedging Policy and Overriding Provisions Relating to Hedging Agreements) to the CTA) designated a Hedging Agreement by the Security Trustee and the Issuer, (and references to “Hedging Agreements” shall be construed accordingly). “Hedging Policy” means the initial hedging policy applicable to SWS and the Issuer set out in Schedule 8 (Hedging Policy and Overriding Provisions Relating to Hedging Agreements) of the CTA as such hedging policy may be amended from time to time by agreement between the Security Trustee, the Issuer and, in certain circumstances, the Hedge Counterparties in accordance with the STID. “Holding Company” means a holding company within the meaning of section 736 of the Companies Act 1985.
261
“IDOK” means an interim determination of K as provided for in Part IV of Condition B of the Licence. “Income” means any interest, dividends or other income arising from or in respect of an Authorised Investment. “Indemnification Deed” means: (a) the deed so named and entered into on 18 July 2003 (as amended from time to time) between, among others, the Obligors, MBIA Assurance S.A. and the Dealers; (b) the deed so named and entered dated 25 May 2005 between the Issuer, SWSGH, SWSH, SWS, MBIA Assurance S.A., RBS and Citigroup Global Markets Limited; (c) the deed so named and entered dated 18 October 2006 between the Issuer, SWSGH, SWSH, SWS, MBIA UK and RBS; (d) the deed so named and entered dated 12 July 2007 between FSA UK, the Issuer and RBS; and each other deed entered into between a Financial Guarantor, the Obligors and the Dealers in respect of a issuance of Wrapped Bonds. “Independent Review” means an independent review resulting from a Trigger Event as set out in Paragraph 3, Part 2 (Trigger Event Consequences) of Schedule 6 to the CTA and set out in Chapter 7 “Summary of the Financing Agreements” under “Common Terms Agreement”. “Indexed Bond” means a bond in respect of which the amount payable in respect of principal and interest is calculated by reference to an index and/or formula as the Issuer and the relevant Dealer(s) may agree (as indicated in the relevant Final Terms). “Individual Bond Certificate” means a Registered Bond in definitive form issued or, as the case may require, to be issued by the Issuer in accordance with the provisions of the Dealership Agreement or any other agreement between the Issuer and the relevant Dealer(s), the Agency Agreement and the Bond Trust Deed, such Registered Bond in definitive form being in the form or substantially in the form set out in Schedule 3, Part B of the Bond Trust Deed having the relevant information supplementing, replacing or modifying the Conditions appearing in the applicable Final Terms endorsed thereon or attached thereto and having a Form of Transfer endorsed thereon. “Initial Authorised Credit Facilities” means the Initial RCF and the Initial Term Facility. “Initial Authorised Credit Facility means the Initial RCF Agreement and the Initial Term Facility Agreements” Agreement. “Initial Authorised Credit Facility means The Royal Bank of Scotland plc, or any successor thereto. Arranger” “Initial Authorised Credit Provider” means The Royal Bank of Scotland plc or any successor thereto. “Initial Date Representation” has the meaning set out in Chapter 7 “Summary of the Financing
262
Agreements” under “Common Terms Agreement — Representations”. “Initial Financial Guarantees” means the financial guarantees issued by the Initial Financial Guarantors (subject to the satisfaction of certain conditions set out in the CP Agreement) in connection with the Sub-Classes of Class A Wrapped Bonds issued on the Initial Issue Date, the Sub-Classes of Class A Wrapped Bonds issued on 27 May 2005, the Sub- Classes of Class A Wrapped Bonds issued on 18 October 2006 and the Sub-Class of Class A Wrapped Bonds issued on 17 July 2007. “Initial Financial Guarantors” means each of MBIA Assurance S.A., MBIA UK and FSA UK. (A decision of the Comité des Entreprises d’Assurance (the French insurance regulator) on 27 December 2007 approved the transfer of the business of MBIA Assurance S.A. to MBIA UK Insurance Limited with effect from 28 December 2007 pursuant to article L.324-1 of the French Insurance Code; MBIA UK Insurance Limited has, therefore, assumed all rights and obligations of MBIA Assurance S.A. under the Transaction Documents as if it were the Initial Financial Guarantor of the Series of Wrapped Bonds issued on 23 July 2003 and 27 May 2005.) “Initial Hedge Counterparties” means The Royal Bank of Scotland plc and Citibank, N.A., London Branch with whom the Issuer has entered into the Initial Hedging Agreements. “Initial Hedging Agreements” means each Hedging Agreement entered into with the Initial Hedge Counterparties on or before the Initial Issue Date. “Initial Issue Date” means 23 July 2003. “Initial Issuer/SWS Loan Agreement” means the loan agreement entered into between the Issuer and SWS on the Initial Issue Date. “Initial Mezzanine Facility Providers” has the meaning given to that term on page 14 of the Prospectus. “Initial RCF” means the revolving credit facilities of an aggregate facility amount of £150,000,000 made available to SWS by the Initial RCF Providers on the Initial Issue Date. “Initial RCF Agent” means The Royal Bank of Scotland plc, or any successor thereto. “Initial RCF Agreement” means a facility agreement dated the Initial Issue Date, as amended and restated on 26 July 2005, under which the Initial RCF was made available to SWS. “Initial RCF Providers” means the syndicate of banks which together provide the Initial RCF. “Initial Term Facility” means the initial term facility made available to the Issuer by the Initial Term Facility Provider on the Initial Issue Date. “Initial Term Facility Agreement” means a facility agreement under which the Initial Term Facility was made available to the Issuer and includes that facility agreement in the form amended and restated at the time of the novation of such facility agreement to Artesian II. “Initial Term Facility Provider” means The Royal Bank of Scotland plc, or any successor thereto including, upon novation of the Initial Term Facility Agreement to Artesian II, Artesian II.
263
“Insolvency Event” means, in respect of any company: (a) the initiation of or consent to Insolvency Proceedings by such company or any other person or the presentation of a petition or application for the making of an administration order (other than in the case of the Issuer) and, in the opinion of the Security Trustee, such proceedings are not being disputed in good faith with a reasonable prospect of success; (b) the giving of notice of appointment of an administrator or the making of an administration order or an administrator being appointed in relation to such company; (c) an encumbrancer (excluding, in relation to the Issuer, the Security Trustee or any receiver) taking possession of the whole or any part of the undertaking or assets of such company; (d) any distress, execution, attachment or other process being levied or enforced or imposed upon or against the whole or any substantial part of the undertaking or assets of such company (excluding, in relation to the Issuer, by the Security Trustee or any receiver) and such order, appointment, possession or process (as the case may be) not being discharged or otherwise ceasing to apply within 30 days; (e) the making of an arrangement, composition, scheme of arrangement, reorganisation with or conveyance to or assignment for the creditors of such company generally or the making of an application to a court of competent jurisdiction for protection from the creditors of such company generally; (f) the passing by such company of an effective resolution or the making of an order by a court of competent jurisdiction for the winding up, liquidation or dissolution of such company (except, in the case of the Issuer, a winding up for the purpose of a merger, reorganisation or amalgamation the terms of which have previously been approved either in writing by the Security Trustee or by an Extraordinary Resolution); (g) the appointment of an Insolvency Official in relation to such company or in relation to the whole or any substantial part of the undertaking or assets of such company; (h) save as permitted in the STID, the cessation or suspension of payment of its debts generally or a public announcement by such person of an intention to do so; or (i) save as provided in the STID, a moratorium is declared in respect of any indebtedness of such person. “Insolvency Official” means, in connection with any Insolvency Proceedings in relation to a company, a liquidator, provisional liquidator, administrator,
264
Special Administrator, administrative receiver, receiver, manager, nominee, supervisor, trustee, conservator, guardian or other similar official in respect of such company or in respect of all or substantially all of the company’s assets or in respect of any arrangement or composition with creditors. “Insolvency Proceedings” means, in respect of any company, the winding-up, liquidation, dissolution, administration of such company, or any equivalent or analogous proceedings under the law of the jurisdiction in which such company is incorporated or of any jurisdiction in which such company carries on business, including the seeking of liquidation, winding-up, reorganisation, dissolution, administration, arrangement, adjustment, protection or relief of debtors. “Instalment Bonds” means any Bonds specified as being instalment bonds in the relevant Final Terms. “Instructing Group” means the Class A DIG or, following repayment in full of the Class A Debt, the Class B DIG or, following repayment of the Class A Debt and the Class B Debt in full, the “Majority Lenders” under the Senior Mezzanine Facility Agreement (as defined therein) and or, following repayment of the Senior Mezzanine Debt in full, the “Majority Lenders” under the Junior Mezzanine Facility Agreement (as defined therein). “Instrument of Appointment” or means the instrument of appointment dated August 1989 under “Licence” sections 11 and 14 of the Water Act 1989 (as in effect on 1 September 1989) under which the Secretary of State for the Environment appointed SWS as a water and sewerage undertaker under that Act for the areas described in the Instrument of Appointment, as modified or amended from time to time. “Insurances” means, as the context may require, any or all of the insurances described in or taken out pursuant to Schedule 16 (Insurances) of the CTA and any other contract or policy of insurance taken out by an Obligor from time to time, including in each case any future renewal or replacement of any such insurance whether with the same or different insurers and whether on the same or different terms as further defined in Schedule 16 (Insurances) of the CTA. “Intellectual Property Right” means all right, title and interest in: (a) any trade mark, service mark, trade name, logo, patent, invention, design or similar right; (b) any designs, copyright, semi-conductor topography, database and know-how or intellectual property right; and (c) all such similar rights which may subsist in any part of the world, in each case whether registered or not, whether in existence now or in the future, and includes any related application. “Intercompany Loan” means the principal amount of all advances from time to time outstanding under an Issuer/SWS Loan Agreement. “Intercreditor Arrangements” means the arrangements between the Secured Creditors of the
265
SWS Financing Group in the STID summarised in Chapter 7 “Summary of the Financing Agreements” under “Security Trust and Intercreditor Deed”. “Interest Commencement Date” means, in the case of interest-bearing Bonds, the date specified in the applicable Final Terms from (and including) which such Bonds bear interest, which may or may not be the Issue Date. “Interest Payment Date” means any date upon which interest or payments equivalent to interest become payable under the terms of any Authorised Credit Facility. “Interest Rate Hedging Agreement” means a Treasury Transaction to swap interest rates. “Investment Grade” means a rating of at least BBB- by Fitch, Baa3 by Moody’s or BBB- by S&P. “Investors Report” means each report produced by SWS and the Issuer to be delivered within 120 days from 31 March or 60 days from 30 September in each year substantially in the form set out in the CTA. “IRC” means the amounts set out under the heading infrastructure renewals charge in the financial projections contained in the supplementary report issued by Ofwat detailing the numbers and assumptions specific to SWS in the Director General’s most recent Final Determination adjusted as appropriate for any subsequent IDOK and for Out-turn Inflation, provided that for the purposes of calculating any financial ratio for any Test Period for which there is no Final Determination, “IRC” shall be SWS’ good faith, honestly held present estimate of such infrastructure renewals charge for such Test Period. “ISDA Master Agreement” means an agreement in the form of the 1992 or 2002 ISDA Master Agreement (Multi-Currency Cross Border) or any successor thereto published by ISDA unless otherwise agreed by the Security Trustee. “Issue Date” means the date of issue of any Tranche of Bonds or the date upon which all conditions precedent to a utilisation under any other Authorised Credit Facility have been fulfilled or waived and the Issuer makes a utilisation of that facility. “Issue Price” means the price as stated on the relevant Final Terms, generally expressed as a percentage of the nominal amount of the Bonds, at which the Bonds will be issued. “Issuer” means Southern Water Services (Finance) Limited a company incorporated in the Cayman Islands with limited liability and company number 112331. “Issuer/SWS Loan Agreement” means any loan agreement entered into between the Issuer and SWS, including the Initial Issuer/SWS Loan Agreement, the Second Issuer/SWS Loan Agreement, the Third Issuer/SWS Loan Agreement, the Fourth Issuer/SWS Loan Agreement and the Fifth Issuer/SWS Loan Agreement. “Joint Venture” means any arrangement or agreement for any joint venture, co- operation or partnership pursuant to, required for or conducive to
266
the operation of the Business by SWS but shall exclude any arrangements or framework agreements entered into with a Contractor which are in accordance with and subject to the Outsourcing Policy. “Junior Mezzanine Debt” means the principal amount outstanding of the loan made by the Junior Mezzanine Facility Providers under the Junior Mezzanine Facility Agreement. “Junior Mezzanine Facility” means a credit facility in the amount of £106,000,000 provided by Junior Mezzanine Facility Providers to the Issuer pursuant to the Junior Mezzanine Facility Agreement. “Junior Mezzanine Facility Agent” means The Royal Bank of Scotland plc or any successor thereto as agent under the Junior Mezzanine Facility Agreement. “Junior Mezzanine Facility means the £106,000,000 junior mezzanine facility agreement dated Agreement” the Initial Issue Date between the Issuer, the Junior Mezzanine Facility Agent, the Junior Mezzanine Facility Arranger, the Original Junior Mezzanine Facility Provider and the Security Trustee. “Junior Mezzanine Facility Arranger” means RBEF Limited. “Junior Mezzanine Facility Provider” means the “Lenders” (as defined in the Junior Mezzanine Facility Agreement). “Junior Mezzanine Finance Parties” means (a) the Junior Mezzanine Facility Agent; (b) the Junior Mezzanine Facility Arranger; and (c) the Junior Mezzanine Facility Providers. “K” means the adjustment factor set for each year by the DGWS by which charges made by Regulated Companies for water supply and sewerage services may be increased, decreased or kept constant. “K3 Period” means the Periodic Review Period that started on 1 April 2000 and ended on 31 March 2005. “K4 Period” means the Periodic Review Period that started on 1 April 2005. “K5 Period” means the Periodic Review Period that will start on 1 April 2010. “Lead Manager” means in relation to any Tranche of Bonds, the person named as the lead manager in the relevant Subscription Agreement. “Lease Calculation Cashflow” means, in respect of any 12 month period commencing on 1 April in any year, for any Finance Lease, a cashflow statement produced by the relevant Finance Lessor on, or as soon as reasonably practicable after, its Lease Calculation Date occurring prior to the commencement of such 12 month period and in accordance with its terms and the terms of the relevant Accession Memorandum, and using, inter alia, for the purposes of calculating the amount shown for each Rental Payment Date falling within the relevant 12 month period under the heading “interest” (or the equivalent thereof (howsoever worded)) in such cashflow statement, a rate of LIBOR, estimated, as at its Lease Calculation Date, by reference to the average of those rates per annum being offered by certain reference banks to prime banks in the London interbank market for
267
entry into 12 month (or such other period as is equal to the relevant Rental Period under such Finance Lease) forward contracts, commencing on each Rental Payment Date arising during the period commencing on such Lease Calculation Date and ending on the last Rental Payment Date to occur during the relevant 12 month period and as agreed between SWS and the relevant Finance Lessor (provided that, where any Finance Lease contains Rentals which are calculated by reference to a fixed rate of interest, any Lease Calculation Cashflow produced in respect of that Finance Lease shall reflect the actual fixed rate of interest implicit in such Rental calculations), provided that where in respect of any Finance Lease there has been a change of assumption resulting in an increase or decrease in the Rental payable thereunder during any 12 month period commencing on 1 April in any year, the Lease Calculation Cashflow applicable to that Finance Lease for such 12 month period shall also include a cashflow statement, produced as soon as reasonably practicable after the time of recalculating the Rental and in accordance with its terms, and the terms of the relevant Accession Memorandum and using, in such cashflow statement, the same estimated interest rates as were used in preparation of the original cashflow statement prepared on or as soon as reasonably practicable after the Lease Calculation Date applicable to that 12 month period. “Lease Calculation Date” means in respect of any Finance Lease: (a) the date of the Accession Memorandum executed by the relevant Finance Lessor relating to such Finance Lease; and (b) the date falling 10 days before the Rental Payment Date immediately preceding the commencement date of the first 12 month period to commence on 1 April immediately after the date referred to in (a) above; and (c) each yearly anniversary of the date referred to in (b) above, save that where any date referred to in (a), (b) or (c) is not a Business Day, such date shall be deemed to be the preceding Business Day. “Lease Reserve Amount” means in respect of any Finance Lease in any 12 month period commencing on 1 April in any year, the lower of (i) the aggregate Notional Amount calculated with respect to such Finance Lease; and (ii) the aggregate amount of rental payments payable to the Finance Lessor under such Finance Lease during such 12 month period (inclusive of VAT) (after adding back any additional rentals (inclusive of VAT) payable and deducting any estimated rental rebates (inclusive of any credit for VAT), in each case as determined in accordance with the provisions of the relevant Finance Lease). “LIBOR” has the meaning given to that term in the relevant Finance Document. “Licence” means the Instrument of Appointment.
268
“Liquidity Facility” means a DSR Liquidity Facility or an O&M Reserve Facility made available under a Liquidity Facility Agreement and “Liquidity Facilities” means all of them. “Liquidity Facility Agent” means, in respect of the Existing DSR Liquidity Facility Agreement, The Royal Bank of Scotland plc and, in respect of any other Liquidity Facility Agreement, the Facility Agent under such Liquidity Facility Agreement. “Liquidity Facility Agreement” means each liquidity facility agreement which has the characteristics set out in Schedule 15 (DSR Liquidity Facility/O&M Reserve Facility Terms) of the CTA, as established in connection with each Sub-Class of Bonds issued by or other Authorised Credit Facility provided to the Issuer or SWS or shortfalls in funding for Projected Operating Expenditure or projected Capital Maintenance Expenditure, each counterparty to which has acceded to the terms of the STID and the CTA. “Liquidity Facility Provider” means any lender from time to time under a Liquidity Facility Agreement that has agreed to be bound by the terms of the STID and the CTA, including the DSR Liquidity Facility Provider(s) and any O&M Reserve Facility Provider(s). “Liquidity Facility Requisite Ratings” means together the Minimum Short-term Rating from at least two Rating Agencies. “London Stock Exchange” means The London Stock Exchange plc. “Majority Creditors” means the Class A DIG Representatives in respect of more than 50 per cent. of the Voted Qualifying Class A Debt or, following the repayment in full of the Class A Debt, the Class B DIG Representatives in respect of more than 50 per cent. of the Voted Qualifying Class B Debt, in each case subject to Clause 8 (Modifications, Consents and Waivers) and Clause 9 (Voting, Instructions and Notification of Outstanding Principal Amount of Qualifying Debt) of the STID as set out in Chapter 7 “Summary of the Financing Agreements”. “Make-Whole Amount” means any amount above par payable on redemption of any Class A Debt or Class B Debt except where such amount is limited to accrued interest. “Mandatory Cost Rate” means, in relation to any Authorised Credit Facility, the addition to the interest rate payable to compensate that Authorised Credit Provider for the cost of compliance with the requirements of the Bank of England and/or the Financial Services Authority (or, in either case, any other authority which replaces all or any of its functions) in accordance with the formula(e) set out in the relevant Authorised Credit Facility. “Market” means the Regulated Market of the London Stock Exchange. “Master Definitions Agreement” or means the master definitions agreement entered into on the Initial “MDA” Issue Date, as amended on 13 October 2006 and from time to time.
269
“Material Adverse Effect” means the effect of any event or circumstance which is materially adverse, taking into account the timing and availability of any rights or remedies under the WIA or the Instrument of Appointment, to: (a) the business, property, operations or financial condition of SWS, the Issuer or of the SWS Financing Group as a whole; (b) the ability of any member of the SWS Financing Group to perform its material obligations under any Finance Document; (c) the validity or enforceability of any Finance Document or the rights or remedies of any Secured Creditor thereunder; or (d) the ability of SWS to perform or comply with any of its obligations under the Instrument of Appointment or the WIA. “Material Agreement” means: (a) for the purpose of Schedule 2 (Material Entity Events) to the CTA and Paragraph 11 (Material Entity Event) of Part 1 and Part 3 of Schedule 6 (Trigger Events) only: (i) any Capex Contract (or series of Capex Contracts) with the same Contractor (or its Affiliates) entered into by SWS for the purposes of, or in connection with, SWS carrying out its Regulated Business, where the NPV at the later of (a) the Initial Issue Date and (b) the date at which it is entered into or amended, supplemented or novated, of the agreed target cost payable by SWS under that Capex Contract (which in each case has not been terminated or expired in accordance with its terms), is, or would be, if such contract was entered into on arm’s length terms and for full value, equal to or greater than £25 million (indexed); and/or (ii) any Outsourcing Agreement (or series of Outsourcing Agreements) entered into with the same Contractor (or its Affiliates) where the annual value of the contracts entered into between SWS and such Contractor (or its Affiliates) (which in each case has not been terminated or expired in accordance with its terms) exceeds (or would exceed if entered into on arms’ length terms) 10 per cent. of the Projected Operating Expenditure for the Test Periods in which such contracts are entered into. (b) except as provided for in (i) above, any Material Capex Agreement and Material O&M Agreement. “Material Capex Agreement” has the meaning given to that term in the Outsourcing Policy.
270
“Material Entity Event” means the events or circumstances set out in Schedule 2 (Material Entity Events) to the CTA and described in Chapter 7 “Summary of the Financing Agreements” under “Common Terms Agreement – Material Entity Events” of this Prospectus. “Material O&M Contract” has the meaning given to that term in the Outsourcing Policy. “Maturity Date” means the date on which a Bond is expressed to be redeemable or any other Authorised Credit Facility is expressed to be repayable in full. “MBIA UK” means MBIA UK Insurance Limited “MBIA Financial Guarantee Fee means the Financial Guarantee Fee Letters between MBIA Letter” Assurance S.A. and the Issuer relating to the MBIA S.A. Initial Financial Guarantees. (A decision of the Comité des Entreprises d’Assurance (the French insurance regulator) on 27 December 2007 approved the transfer of the business of MBIA Assurance S.A. to MBIA UK Insurance Limited with effect from 28 December 2007 pursuant to article L.324-1 of the French Insurance Code; MBIA UK Insurance Limited has, therefore, assumed all rights and obligations of MBIA Assurance S.A. under the Transaction Documents as if it were the Initial Financial Guarantor of the Series of Wrapped Bonds issued on 23 July 2003 and 27 May 2005.) “MBIA S.A. Initial Financial means the financial guarantees issued by MBIA Assurance S.A. in Guarantees” respect of Class A Wrapped Bonds issued on 23 July 2003 and on 27 May 2005. (A decision of the Comité des Entreprises d’Assurance (the French insurance regulator) on 27 December 2007 approved the transfer of the business of MBIA Assurance S.A. to MBIA UK Insurance Limited with effect from 28 December 2007 pursuant to article L.324-1 of the French Insurance Code; MBIA UK Insurance Limited has, therefore, assumed all rights and obligations of MBIA Assurance S.A. under the Transaction Documents as if it were the Initial Financial Guarantor of the Series of Wrapped Bonds issued on 23 July 2003 and 27 May 2005.) “Member State” means a member state of the European Union. “Meter Optants” means domestic customers who have opted to be charged on the basis of a meter reading rather than by rateable value. “Mezzanine Debt” means the Senior Mezzanine Debt and the Junior Mezzanine Debt. “Mezzanine Facilities” means the Senior Mezzanine Facility and the Junior Mezzanine Facility. “Mezzanine Facility Agreements” means the Senior Mezzanine Facility Agreement and the Junior Mezzanine Facility Agreement. “Mezzanine Facility Provider” means a Senior Mezzanine Facility Provider and/or a Junior Mezzanine Facility Provider. “Mezzanine Finance Parties” means the Senior Mezzanine Finance Parties and the Junior Mezzanine Finance Parties. “Minimum Short-term Rating” means, in respect of any person, such person’s short-term
271
unsecured debt obligations being rated, in the case of Moody’s, “Prime-1”; in the case of S&P, “A-1”; and in the case of Fitch, “F-1”. “Monthly Payment Amount” has the meaning set out in Paragraph 5.9 of Schedule 12 (Cash Management) to the Common Terms Agreement, approximately (and subject to adjustment) equal to 1/12th of SWS’ Annual Finance Charge for the relevant 12 month period. “Moody’s” means Moody’s Investors Service, Limited, or any successor to the rating agency business of Moody’s Investors Service, Limited. “Moody’s Minimum Long-term means in respect of any person, such person’s long-term unsecured Rating” debt obligations being rated A2 by Moody’s. “Net Cash Flow” means: (a) in respect of any historical element of a Test Period, the aggregate of net cash flow from operating activities as shown in the SWS financial statements (after adding back, without double counting, and to the extent that such items are included in net cash flow from operating activities, any exceptional items (other than non-cash exceptional items), any recoverable VAT, any Capital Expenditure and any movement in debtors and/or creditors relating to Capital Expenditure) minus corporation tax paid which shall exclude payments in respect of a Permitted Tax Loss Transaction as part of any SWS/SWSG Debt Service Distribution, during such Test Period; and (b) in respect of any forward-looking element of a Test Period, the aggregate of anticipated net cash flow from operating activities (after adding back, without double counting and to the extent that such items are included in the anticipated net cash flow from operating activities, any exceptional items (other than non-cash exceptional items), any recoverable VAT, any Capital Expenditure and any movement in debtors and/or creditors relating to Capital Expenditure in each case anticipated to occur during such Test Period) minus corporation tax which shall exclude payments in respect of a Permitted Tax Loss Transaction as part of any SWS/SWSG Debt Service Distributions anticipated to be paid during such Test Period less any anticipated net cash flow from operating activities of its business other than its Appointed Business and after adding back corporation tax anticipated to be paid as a result of such businesses during such Test Period. “New Money Advance” means any drawing during a Standstill under any Authorised Credit Facility which is not made (or to the extent not made) for the purpose of refinancing a drawing under such Authorised Credit Facility. “Non-Appointed Expense” means any expense incurred in connection with activities other than Appointed Business.
272
“Non-Base Currency” means a currency other than pounds sterling. “Notice” or “notice” means, in respect of a notice to be given to Bondholders, a notice validly given pursuant to Condition 17 (Notices). “Notified Item” has the meaning given to such term in Chapter 6 “Regulation of the Water and Wastewater Industry in England and Wales” under “Interim Determinations of K”. “Notional Amount” means, in respect of any Finance Lease, a sum, certified by any Authorised Signatory of the relevant Finance Lessor on each Lease Calculation Date and using the relevant Lease Calculation Cashflow relating thereto as being, for the succeeding 12 month period commencing on 1 April, the amount shown for each Rental Payment Date falling in that relevant 12 month period under the headings “interest” and “margin” (or any equivalents thereof (howsoever worded)) in such Lease Calculation Cashflow, together with an amount equal to the VAT on such amount at the rate applicable to rentals payable under the relevant Finance Lease. “NPV” means, in respect of any amount payable or receivable at a future date, such amount discounted back to the date of calculation on an annual basis at a discount rate of 7.5 per cent. “O&M Reserve” means the amounts standing to the credit of the O&M Reserve Accounts. “O&M Reserve Accounts” means the accounts of SWS and/or the Issuer entitled “O&M Reserve Account” held at the Account Bank and includes any sub- account relating to that account and any replacement account from time to time. “O&M Reserve Facility” means any operation and maintenance reserve liquidity facility made available under a Liquidity Facility Agreement. “O&M Reserve Facility Agreement” means an agreement establishing an O&M Reserve Facility. “O&M Reserve Facility Provider” means any provider from time to time of an O&M Reserve Facility. “O&M Reserve Required Amount” means not less than 10 per cent. of Projected Operating Expenditure and Capital Maintenance Expenditure required for the next succeeding 12 month period as forecast in the SWS Business Financial Model. “Obligors” means the Issuer, SWS, SWSH and SWSGH and “Obligor” means any of them. “Official List” means the official list of the UKLA. “OFT” means the Office of Fair Trading in the United Kingdom. “Ofwat” means the WSRA including its successor office or body. “Operating Accounts” means each account of SWS with the following titles: SWS Ltd. CAO Income, SWS Ltd. Misc Income, SWS Collections, SWS Ltd. No.2 Refunds, General Payments No.3, and SWS Ltd. Central Account held at the Account Bank and includes any sub-account or sub-accounts relating to that account and any replacement
273
account or accounts from time to time. “Order” means the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005. “Ordinary Drought Order” means an order granted by DEFRA that allows a Regulated Company to stop or limit the use of water for a range of purposes specified in the Drought Direction 1991. “Original Junior Mezzanine Facility means Royal Bank Investments Limited. Provider” “Original Senior Mezzanine Facility means Royal Bank Investments Limited. Provider” “Other Parties” means the Hedge Counterparties, the Liquidity Facility Providers, the Authorised Credit Providers, the Mezzanine Facility Providers, the Agents, the Account Bank, the Standstill Cash Manager and members of the Group (other than the Obligors). “Outsourcing Agreement” means any agreement pursuant to which SWS sub-contracts, tenders or outsources either the day to day operation of its assets, business services and service delivery (including any maintenance expenditure) or acquires technical know-how and access to other Intellectual Property Rights in relation to water and sewerage services that, in the case of any outsourcing SWS could, if not outsourced, perform itself. “Outsourcing Policy” means the outsourcing policy set out in Schedule 9 (Outsourcing Policy) to the CTA (as amended or replaced from time to time). “Outstanding” means, in relation to the Bonds of all or any Sub-Class, all the Bonds of such Sub-Class issued other than: (a) those Bonds which have been redeemed pursuant to the Bond Trust Deed; (b) those Bonds in respect of which the date (including, where applicable, any deferred date) for redemption in accordance with the Conditions has occurred and the redemption moneys (including all interest payable thereon) have been duly paid to the Bond Trustee or to the Principal Paying Agent in the manner provided in the Agency Agreement (and where appropriate notice to that effect has been given to the relative Bondholders in accordance with Condition 17 (Notices)) and remain available for payment against presentation of the relevant Bonds and/or Receipts and/or Coupons; (c) those Bonds which have been purchased and cancelled in accordance with Conditions 8(f) (Purchase of Bonds) and (h) (Redemption, Purchase and Cancellation — Cancellation); (d) those Bonds which have become void or in respect of which claims have become prescribed, in each case under Condition 13 (Prescription);
274
(e) those mutilated or defaced Bonds which have been surrendered and cancelled and in respect of which replacements have been issued pursuant to Condition 14 (Replacement of Bonds, Coupons, Receipts and Talons); (f) (for the purpose only of ascertaining the nominal amount of the Bonds outstanding and without prejudice to the status for any other purpose of the relevant Bonds) those Bonds which are alleged to have been lost, stolen or destroyed and in respect of which replacements have been issued pursuant to Condition 14 (Replacement of Bonds, Coupons, Receipts and Talons); and (g) in the case of Bearer Bonds, any Global Bond to the extent that it shall have been exchanged for Definitive Bonds or another Global Bond and, in the case of Registered Bonds, any Global Bond Certificate to the extent that it shall have been exchanged for Individual Bond Certificates, and, in each case, pursuant to its provisions, the provisions of the Bond Trust Deed and the Agency Agreement, PROVIDED THAT for each of the following purposes, namely: (i) the right to attend and vote at any meeting of the holders of the Bonds of any Sub-Class; (ii) the determination of how many and which Bonds of any Sub-Class are for the time being outstanding for the purposes of Clause 8 of the Bond Trust Deed, Condition 15 (Meetings of Bondholders, Modification, Waiver and Substitution), Clause 9 (Voting, Instructions and Notification of Outstanding Principal Amount of Qualifying Debt) of the STID and Paragraphs 2, 5, 6 and 13 of Schedule 4 to the Bond Trust Deed; (iii) any discretion, power or authority (whether contained in the Bond Trust Deed or vested by operation of law) which the Bond Trustee is required, expressly or impliedly, to exercise in or by reference to the interests of the holders of the Bonds of any Sub-Class; and (iv) the determination by the Bond Trustee whether any event, circumstance, matter or thing is, in its opinion, materially prejudicial to the interests of the holders of the Bonds of any Sub-Class, those Bonds of the relevant Sub-Class (if any) which are for the time being held by or on behalf of the Issuer, the other Obligors, or any Associate of the Issuer or the other Obligors (other than any Associate which is a licensed or regulated financial institution which holds Bonds in the ordinary course of its business), in each case as beneficial owner, shall (unless and until ceasing to be so held) be deemed not to remain outstanding. “Outstanding Principal Amount” means, as at any date that the same falls to be determined:
275
(a) in respect of Wrapped Debt (unless an FG Event of Default has occurred and is continuing in respect of the Financial Guarantor of such Wrapped Debt), the aggregate of any unpaid amounts owing to a Financial Guarantor under a G&R Deed to reimburse it for any amount paid by it under a Financial Guarantee in respect of unpaid principal on such Wrapped Debt and the principal amount outstanding (or the Equivalent Amount) under such Wrapped Debt (including, in the case of Wrapped Bonds, any premium); (b) in respect of Wrapped Debt (if an FG Event of Default has occurred and is continuing in respect of the Financial Guarantor of such Wrapped Debt), the principal amount outstanding (or the Equivalent Amount) of such Wrapped Debt (including, in the case of Wrapped Bonds, any premium); (c) in respect of Unwrapped Debt, the principal amount outstanding (or the Equivalent Amount) of such Unwrapped Debt (including, in the case of Wrapped Debt, any premium); (d) in respect of any Authorised Credit Facilities that are loans (but do not constitute Wrapped Debt), the principal amount (or the Equivalent Amount) of any drawn amounts that are outstanding under such Authorised Credit Facility; (e) in respect of each Finance Lease, the Equivalent Amount of either (i) prior to an Acceleration of Liabilities (other than a Permitted Lease Termination) under such Finance Lease and subject to any increase or reduction calculated in accordance with Clause 9.9 (Notification of Outstanding Principal Amount of Qualifying Debt) of the STID, the highest termination value which may fall due during the Rental Period encompassing such date, calculated upon the assumptions set out in the cashflow report provided by the relevant Finance Lessor on the first day of each such Rental Period (or in the most recently generated cashflow report which is current on such date) or (ii) following any Acceleration of Liabilities (other than a Permitted Lease Termination) under such Finance Lease, the actual amount (if any) that would be payable to the relevant Finance Lessor in respect of a termination of the leasing of the Equipment on the date of such Acceleration of Liabilities (other than a Permitted Lease Termination);
276
(f) in respect of each Hedging Agreement, the Equivalent Amount of the amount (if any) that would be payable to the relevant Hedge Counterparty if an early termination date was designated on such date in respect of the transaction or transactions arising under the Hedging Agreement pursuant to the ISDA Master Agreement governing such transaction or transactions and subject to Schedule 8 (Hedging Policy and Overriding Provisions Relating to Hedging Agreements) of the CTA; and (g) in respect of any other Secured Liabilities, the Equivalent Amount of the outstanding principal amount of such debt on such date in accordance with the relevant Finance Document, all as most recently certified or notified to the Security Trustee, where applicable, pursuant to Clause 9.9 (Notification of Outstanding Principal Amount of Qualifying Debt) of the STID. “Out-turn Inflation” means, in respect of any period for which the relevant indices have been published, the actual inflation rate applicable to such period determined by reference to movements in the Retail Price Index adjusted, as appropriate, in the case of capital additions, for any divergence between the actual movement of national construction costs, as evidenced by the Construction Output Price Index (or such other index as the Director General may specify for the purposes of Condition B, of the Instrument of Appointment or otherwise) relative to the Retail Price Index from their base levels as used in the most recent Final Determination or IDOK and their relative movement as projected by the Director General for the purposes of that determination, and, in respect of any period, including future periods, for which the relevant indices have not yet been published, by reference to forecast rates consistent with the average monthly movement in such indices over the previous 12 months for which published indices are available. “Participating Member State” means a member state of the European Community that adopts or has adopted the euro as its lawful currency under the legislation of the European Union for European Monetary Union. “Partly Paid Bond” means a bond issued in the amount as specified in the relevant Final Terms and in respect of which further instalments will be payable in the amounts and on the dates as specified in the relevant Final Terms. “Party” means in relation to a Finance Document a party to such Finance Document. “Paying Agents” means, in relation to all or any Sub-Classes of the Bonds, the several institutions (including, where the context permits, the Principal Paying Agent and/or the Registrar) at their respective specified offices initially appointed as paying agents in relation to such Bonds by the Issuer and the Obligors pursuant to the Agency Agreement and/or, if applicable, any successor paying agents at their respective specified offices in relation to all or any Sub-
277
Classes of the Bonds. “Payment Date” means each date on which a payment is made or is scheduled to be made by an Obligor in respect of any obligations or liability under any Authorised Credit Facility. “Payment Priorities” means the order of priority of the Permitted Payments to be made by the Issuer on each Payment Date as set out in Chapter 7 “Summary of the Financing Agreements” under “Cash Management” as adjusted following the taking of any Enforcement Action and following termination of a Standstill (other than pursuant to a waiver or revocation by the Majority Creditors) in accordance with Paragraph 8.12 of Schedule 12 to the CTA. “Pension Companies” means SWEPST and SWPT. “Periodic Information” means: (a) SWS’ annual charges scheme with details of tariffs: (b) a summary of SWS’ strategic business plan at each Periodic Review; (c) SWS’ current Procurement Plan (if any); (d) SWS’ annual drinking water quality report; (e) SWS’ annual environmental report; (f) SWS’ annual conservation and access report; and (g) such other periodic information compiled by SWS for Ofwat. “Periodic Review” means the periodic review of K (as that term is defined in the Instrument of Appointment) as provided for in Condition B of the Instrument of Appointment. “Periodic Review Effective Date” means the date with effect from which the new K (as that term is defined in the Instrument of Appointment) will take effect, following a Periodic Review. “Periodic Review Period” means the period commencing on a Periodic Review Effective Date and ending on the next Date Prior. “Permanent Global Bond” means in relation to any Sub-Class of Bearer Bonds a global bond in the form or substantially in the form set out in Schedule 2, Part B to the Bond Trust Deed with such modifications (if any) as may be agreed between the Issuer, the Principal Paying Agent, the Bond Trustee and the Relevant Dealers, together with the copy of each applicable Final Terms annexed thereto, comprising some or all of the Bearer Bonds of the same Sub-Class, issued by the Issuer pursuant to the Dealership Agreement or any other agreement between the Issuer and the relevant Dealer(s) relating to the Programme, the Agency Agreement and the Bond Trust Deed in exchange for the whole or part of any Temporary Global Bond issued in respect of such Bearer Bonds. “Permitted Acquisition” means any of the following carried out by SWS:
278
(a) an acquisition (including Authorised Investments), but not of any company or shares therein, partnership or Joint Venture, made on arm’s length terms and in the ordinary course of trade; (b) an acquisition of assets required to replace surplus, obsolete, worn-out, damaged or destroyed assets which in the reasonable opinion of SWS are required for the efficient operation of its Business or in accordance with the Finance Leases; (c) an acquisition of assets (but not of any company or shares therein, partnership or Joint Venture) made on arm’s length terms entered into for bona fide commercial purposes in furtherance of SWS’ statutory and regulatory obligations; (d) an inset business in the United Kingdom which is or will be included in RCV and which breaches neither the Instrument of Appointment nor the WIA; and (e) any acquisition made or Joint Venture entered into with the consent of the Security Trustee and each Financial Guarantor. “Permitted Book Debt Disposal” means the disposal of book debts in each financial year with a nominal value of up to £5,000,000 (indexed) (or a greater amount with the prior written consent of the Security Trustee and each Financial Guarantor) by SWS on arm’s length terms to any person other than an Affiliate, where: (a) such book debts are sold to a person or persons whose business is the recovery of debts; (b) SWS has made a prudent provision in its accounts against the non-recoverability of such debts; (c) any write-back of any provision for non-recoverability arising from the sale can only be treated as operating profit for the purposes of the financial ratios once the relevant recourse period against SWS has expired; and (d) the SWS Business Financial Model is updated to ensure that the transaction is taken into account in calculating all relevant financial ratios under the CTA. “Permitted Disposal” means any disposal made by SWS which: (a) is made in the ordinary course of trading of the disposing entity or in connection with an arm’s length transaction entered into for bona fide commercial purposes for the benefit of the Business; (b) is of assets in exchange for other assets comparable or superior as to type, value and quality; (c) is of Equipment pursuant to the Finance Leases;
279
(d) would not result in the Senior RAR, calculated for each Test Period by reference to the most recently occurring Calculation Date (adjusted on a pro-forma basis to take into account the proposed disposal), being more than or equal to 0.900:1; (e) is a disposal for cash on arm’s length terms of any surplus or obsolete or worn-out assets which, in the reasonable opinion of SWS, are not required for the efficient operation of its Business and which does not cause a Trigger Event under Paragraph 1, Part 1 (Trigger Events) of Schedule 6 to the CTA; (f) is made pursuant to the Outsourcing Policy; (g) is a Permitted Book Debt Disposal; (h) is a disposal of Protected Land (as that term is defined in the WIA) in accordance with the terms of the Instrument of Appointment; (i) is a disposal or surrender of tax losses which is a Permitted Tax Loss Transaction; (j) is the disposal of assets owned by SWS which form part of its Permitted Non-Appointed Business; (k) is any other disposal which is in accordance with the Instrument of Appointment provided that the consideration (both cash and non-cash) received by SWS (or which would be received by SWS if such disposal was made on arm’s length terms for full commercial value to an unconnected third party) in respect of any such disposal when aggregated with all other such disposals by it made in (i) the immediately preceding 12 month period does not exceed 2.5 per cent. of RCV (or its equivalent) and (ii) in the immediately preceding five-year period does not exceed 10 per cent. of RCV (or its equivalent); or (l) is a disposal of assets to a partnership or a Joint Venture made on arm’s lengths terms entered into for bona fide commercial purposes in furtherance of SWS’ statutory and regulatory obligations, provided that in each case such disposal does not cause any of the Trigger Event Ratio Levels to be breached. “Permitted Emergency Action” means any remedial action taken by SWS during an Emergency which is in accordance with the policies, standards and procedures for emergency planning manual (EMPROC) of SWS (as amended from time to time), Ofwat guidance notes and Public Procurement Rules and which SWS considers necessary and which continues only so Long as required to remedy the Emergency but in any event no longer than 28 days or such longer period as is agreed by SWS, the Security Trustee and each Financial Guarantor. “Permitted Existing Non-Appointed means any business other than the Appointed Business which is Business” carried on by SWS at the Initial Issue Date and (a) which falls
280
Business” within the Permitted Non-Appointed Business Limits applicable to Permitted Existing Non-Appointed Business, and (b) in respect of which all material risks related thereto are insured in accordance with Good Industry Practice, and (c) which does not give rise to any material actual or contingent liabilities for SWS that are not properly provided for in its financial statements. “Permitted Existing Pension means (i) the SWPS (ii) the SWEPS, (iii) the ScottishPower group Schemes” Final Salary Scheme, (iv) the ScottishPower group Money Purchase LifePlan, (v) the Manweb Group of the Electricity Supply Pension Scheme and (vi) the Scottish Power group Pension Scheme. “Permitted Financial Indebtedness” means: (a) Financial Indebtedness incurred under the Issuer/SWS Loan Agreements; (b) Financial Indebtedness incurred by one member of the SWS Financing Group to another member if the recipient of that Financial Indebtedness is an Obligor; (c) Financial Indebtedness incurred under any Finance Document as at the Initial Issue Date; (d) Financial Indebtedness incurred under a Treasury Transaction provided it is in compliance with the Hedging Policy; (e) any unsecured indebtedness provided that the aggregate amount of such Financial Indebtedness does not exceed £25,000,000 (indexed from the Initial Issue Date); (f) any Subordinated Debt entered into after the Initial Issue Date and the SWS Preference Shares; (g) such further Financial Indebtedness incurred by the Issuer or SWS that complies with the following conditions: (i) at the time of incurrence of that Financial Indebtedness, no Default is continuing or will arise as a result of the incurrence of such Financial Indebtedness; (ii) the Financial Indebtedness is made available pursuant to an Authorised Credit Facility Agreement the provider of which is a party to, or has acceded to, the CTA and STID; (iii) as a result of the incurrence of the Financial Indebtedness: (A) SWS and the Issuer will not be in breach of Paragraph 4 (DSR Liquidity Facility) of Part 2 of Schedule 5 (Financial Covenants) and Paragraph 38 (Control of Repayment Schedules) of Part 3 (General Covenants) of Schedule 5 (Covenants) to the CTA; and
281
(B) no Authorised Credit Provider will have substantially better or additional Entrenched Rights under the STID than those Authorised Credit Providers providing similar Financial Indebtedness of the same class; and (C) the Hedging Policy shall continue to be complied with in all respects; (iv) the Financial Indebtedness which is Class A Debt ranks (save for, if applicable, any Financial Guarantee) pari passu in all respects with all other Class A Debt and the Financial Indebtedness that is Class B Debt ranks (save for, if applicable, any Financial Guarantee) pari passu in all respects with all other Class B Debt; (v) if such further Financial Indebtedness is Class A Debt or Class B Debt then the Senior RAR (adjusted on a pro forma basis to take into account the proposed incurrence of such further Financial Indebtedness) must be less than or equal to 0.900:1 for each Test Period calculated by reference to the then most recently occurring Calculation Date; (vi) if such further Financial Indebtedness is Class A Debt then (taking into account the proposed incurrence of such debt) the Class A RAR must be less than or equal to 0.75:1 and the Class A Adjusted ICR must be greater than or equal to 1.30:1 for each Test Period calculated by reference to the then most recently occurring Calculation Date; and (vii) if such further Financial Indebtedness is incurred under a Finance Lease, the amount of that Financial Indebtedness, when aggregated with all other Financial Indebtedness under Finance Leases, shall not exceed an amount 15 per cent. of RCV or its equivalent. For the purposes of this definition only, the termination sums payable under a Treasury Transaction that has been terminated shall not be treated as Financial Indebtedness and the occurrence of such event shall not be construed as the incurrence of Financial Indebtedness. “Permitted Hedge Termination” means the termination of a Hedging Agreement in accordance with the provisions of Schedule 8 (Hedging Policy and Overriding Provisions Relating to Hedging Agreements) of the CTA. “Permitted Lease Termination” means any termination of the leasing of all or any part of the Equipment (or the prepayment of the Rentals arising by reason of such termination) in the following circumstances:
282
(a) Total Loss: Pursuant to any provision of a Finance Lease whereby the leasing of all or any part of the Equipment thereunder will terminate following a total loss of such Equipment save that SWS or the Issuer (as applicable) will not make payment to the relevant Finance Lessor of any sums due and payable under the relevant Finance Lease in respect of such total loss if (I) an Acceleration of Liabilities other than Permitted Hedge Terminations and Permitted Lease Terminations in respect of other Finance Leases has occurred or (ii) a Default Situation is subsisting or would occur as a result of such payment; or (b) Illegality: Pursuant to any provision of a Finance 22; or (c) Voluntary Prepayment/Termination: Pursuant to any provision of a Finance Lease whereby SWS or the Issuer (as applicable) will be entitled to voluntarily terminate (and require payment of a termination sum), or prepay the Rentals due to, the leasing of certain Equipment under such Finance Lease provided that (i) no Acceleration of Liabilities other than Permitted Hedge Terminations and Permitted Lease Terminations in respect of other Finance Leases has occurred or (ii) no Default Situation is subsisting or would occur as a result of such prepayment or termination. “Permitted New Non-Appointed means any business other than the Appointed Business and Business” Permitted Existing Non-Appointed Business provided that (a) such business: (I) is prudent in the context of the overall business of SWS and continues to be prudent for the duration of that Permitted New Non-Appointed Business; and (ii) is not reasonably likely to be objected to by the Director General; and (iii) falls within the Permitted Non-Appointed Business Limits applicable to Permitted Non-Appointed Business; (b) all material risks related thereto are insured in accordance with Good Industry Practice; and (c) such business does not give rise to any material actual or contingent liabilities for SWS that are not properly provided for in its financial statements. “Permitted Non-Appointed Business” means Permitted Existing Non-Appointed Business and Permitted New Non-Appointed Business. “Permitted Non-Appointed Business means income received by SWS pursuant to its Permitted Non- Income” Appointed Business “Permitted Non-Appointed Business means, in respect of Permitted Non-Appointed Business, that the Limits” average of the Non-Appointed Expenses during the current Test Period and the immediately two preceding Test Periods does not exceed 2.5 per cent. of Cash Expenses of SWS during such Test Periods. “Permitted Payments” means the application of monies credited to the Debt Service Payment Account in accordance with the Payment Priorities. “Permitted Post Closing Events” means:
283
(a) payment of transaction fees and expenses to the extent not paid on the Initial Issue Date: or (b) payments of all amounts outstanding under the Bridge Facility Agreement and related documentation and the discharge of the security created under such document; or (c) any other payments listed in writing by SWS as at the Initial Issue Date and signed by way of approval by the Security Trustee. “Permitted Security Interest” means any security interest falling under paragraphs (a) to (g) (inclusive) below which is created by any Obligor, any security interest falling under paragraphs (h) to (k) (inclusive) below which is created by SWS or the Issuer and any security interest falling under paragraphs (l) to (r) (inclusive) below which is created by SWS: (a) Security Interest created under the Security Documents or contemplated by the Finance Documents; (b) any Security Interest specified in Schedule 12 (Cash Management) to the CTA, if the principal amount thereby secured is not increased; (c) a Security Interest comprising a netting or set-off arrangement entered into by a member of the SWS Financing Group in the ordinary course of its banking arrangements; (d) a right of set-off, banker’s liens or the like arising by operation of law or by contract by virtue of the provision of any overdraft facility and like arrangements arising as a consequence of entering into arrangements on the standard terms of any bank providing an overdraft; (e) any Security Interest arising under statute or by operation of law in favour of any government, state or local authority in respect of taxes, assessments or government charges which are being contested by the relevant member of the SWS Financing Group in good faith and with a reasonable prospect of success; (f) any Security Interest created in respect of any pre-judgment legal process or any judgment or judicial award relating to security for costs, where the relevant proceedings are being contested in good faith by the relevant member of the SWS Financing Group by appropriate procedures and with a reasonable prospect of success;
284
(g) a security interest comprising a netting or set-off arrangement entered into under any hedge arrangement entered into in accordance with the Hedging Policy where the obligations of other parties thereunder are calculated by reference to net exposure thereunder (but not any netting or set-off relating to such hedge arrangement in respect of cash collateral or any other Security Interest except as otherwise permitted hereunder); (h) a lien in favour of any bank over goods and documents of title to goods arising in the ordinary course of documentary credit transactions entered into in the ordinary course of trade; (i) a Security Interest created over shares and/or other securities acquired in accordance with the CTA held in any clearing system or listed on any exchange which arise as a result of such shares and/or securities being so held in such clearing system or listed on such exchange as a result of the rules and regulations of such clearing system or exchange; (j) a Security Interest approved by the Security Trustee, the holder of which has become a party to the STID; (k) a Security Interest over or affecting any asset acquired on arm’s length terms after the date hereof and subject to which such asset is acquired, if: (i) such Security Interest was not created in contemplation of the acquisition of such asset; (ii) the amount thereby secured has not been increased in contemplation of, or since the date of, the acquisition of such asset by a member of the SWS Financing Group; and (iii) unless such Security Interest falls within any of paragraphs (m) to (r) below (A) such Security Interest is removed or discharged within six months of the date of acquisition of such asset; or (B) the holder thereof becomes party to the STID; (l) a Security Interest arising in the ordinary course of business and securing amounts not more than 90 days overdue or if more than 90 days overdue, the original deferral was not intended to exceed 90 days and such amounts are being contested in good faith; (m) a Security Interest arising under or contemplated by any Finance Leases, hire purchase agreements, conditional sale agreements or other agreements for the acquisition of assets on deferred purchase terms where the counterparty becomes party to the STID; (n) a right of set-off existing in the ordinary course of trading activities between SWS and its suppliers or customers;
285
(o) a lien arising under statute or by operation of law (or by agreement having substantially the same effect) and in the ordinary course of business provided that such lien is discharged within 30 days of any member of the SWS Financing Group becoming aware that the amount owing in respect of such lien has become due; (p) a Security Interest arising on rental deposits in connection with the occupation of leasehold premises in the ordinary course of business; (q) any retention of title arrangements entered into by SWS in the ordinary course of business; or (r) in addition to any Security Interests subsisting pursuant to the above any other Security Interests provided that the aggregate principal amount secured by such Security Interests does not at any time exceed £10,000,000 (or its equivalent) (indexed from the Initial Issue Date), to the extent and for so long, in each case, as the creation or existence of the Security Interest would not contravene the terms of the Instrument of Appointment, the WIA or any requirement under the Instrument of Appointment or the WIA. “Permitted Share Pledge means the acceleration by the Secured Creditors (subject to the Acceleration” availability of funds) of their respective claims to the extent necessary to apply proceeds of enforcement of the share pledges provided by SWSGH and SWSH pursuant to the Security Agreement. “Permitted Subsidiaries” means the Pension Companies and the Issuer and any other Subsidiary of SWS from time to time which is acquired by SWS pursuant to a Permitted Acquisition and is notified in writing to the Security Trustee on or as soon as practicable after the date of such acquisition. “Permitted Tax Loss Transaction” means any surrender of tax losses or agreement relating to tax benefit or relief (including for the avoidance of doubt an election under section 171A Taxation of Chargeable Gains Act 1992) or any other agreement relating to tax between: (a) an Obligor and any other member of the SWS Financing Group; or (b) an Obligor and any other member of the Group (not being a member of the SWS Financing Group) in the following circumstances;
286
(i) where the company receiving the benefit, tax loss or relief (the “Recipient Company”) is an Obligor, the Obligor either makes no payment for the benefit, tax loss or relief or makes a payment which does not exceed the tax saved and is made only in circumstances in which (if SWS is the Recipient Company and SWSG is the surrendering company) it will be applied in immediate payment to SWS of interest due and payable under the SWS/SWSG Loan Agreement or in which it has been demonstrated to the satisfaction of the Security Trustee (acting in accordance with STID) that the utilisation of the benefit, tax loss or relief by the Recipient Company would not be subject to challenge by HM Revenue and Customs (save in the event of fraud or negligence); (ii) where the Recipient Company is a member of the Group (other than an Obligor), a payment is made to the Obligor of an amount equal to the tax saved within 30 days of the claim being made by the Recipient Company to include the benefit, tax loss or relief in the tax return (whether the tax return originally filed or an amendment to that tax return) it files with HM Revenue and Customs, provided that to the extent that it is subsequently demonstrated to the satisfaction of the Security Trustee (acting in accordance with the STID) that there is no such utilisation of such benefit, tax loss or relief by the Recipient Company, then amounts paid to the Obligor by the Recipient Company for such benefit, tax loss or relief should be refunded within 30 days of such fact being so demonstrated. “Permitted Volume Trading means contracts entered into by any member of the Group or any Arrangements” Associate thereof with suppliers for the supply of goods and services to the SWS Financing Group on terms that discounts are available as a result of such arrangements, provided that any Obligor making use of such arrangements will reimburse the relevant member of the Group or Associate for any Financial Indebtedness by way of amounts payable by such member of the Group or Associate to such supplier as a result of such Obligor making use of such arrangements. “Potential Event of Default” means (other than in any Hedging Agreement, where “Potential Event of Default” has the meaning given to it in that Hedging Agreement) an event which would be (with the expiry of a grace period, the giving of notice or the making of any determination under the Finance Documents or any combination of them) an Event of Default. “Potential Trigger Event” means any event which would (with the expiry of any relevant grace period or the giving of notice or any combination thereof) if not remedied or waived become a Trigger Event. “Preference Shares” means the Class A1 Preference Shares, Class A2 Preference Shares and Class B Preference Shares.
287
“Principal Amount Outstanding” means, in relation to a Bond, Sub-Class or Class, the original face value thereof less any repayment of principal made to the holder(s) thereof in respect of such Bond, Sub-Class or Class. “Principal Paying Agent” means Deutsche Bank AG London under the Agency Agreement, or its Successors thereto. “Proceeds” means the aggregate of all receipts or recoveries by the Security Trustee pursuant to, or upon enforcement of, any of the Rights (including pursuant to Clause 11.6 (Receipts Held in Trust) of the STID) after deducting (to the extent not already deducted or retained prior to such receipt or recovery by the Security Trustee) all sums which the Security Trustee is required under the Finance Documents or by applicable law to pay to any other person before distributing any such receipts or recoveries to any of the Secured Creditors. “Procurement Plan” means the procurement plan (if any) prepared and amended from time to time by SWS in accordance with its obligations under the Instrument of Appointment after notifying the Security Trustee and each Financial Guarantor and consulting with the Security Trustee and each Financial Guarantor who, within reasonable time thereafter, notifies SWS that it wishes to be consulted. “Programme” means the £6,000,000,000 guaranteed bond programme established by the Issuer admitted to the Official List and to the London Stock Exchange. “Projected Operating Expenditure” means, at any time, the operating expenditure projected in the operating budget for the Test Period in which such date falls. “Prospectus” has the meaning given to that term on page 7 of this prospectus. “Protected Land” means, in relation to a Regulated Company, any land which, or any interest or right in or over land which: (a) was transferred to that company in accordance with a scheme under Schedule 2 to the Water Act 1989 or, where that company is a statutory water company (as defined in the WIA), was held by that company at any time during the financial year ending 31 March 1990; (b) is or has at any time on or after 1 September 1989 been held by that company for purposes connected with the carrying out of its functions as a water undertaker or sewerage undertaker; or (c) has been transferred to that company in accordance with a scheme under Schedule 2 to the WIA from another company in relation to which that land was protected when the other company held an instrument of appointment. “PSM” means the London Stock Exchange’s Professional Securities Market. “Public Procurement Rules” means public procurement rules of the United Kingdom (including the Utilities Contracts Regulations 1996 (SI 1996/2911) as amended by the Utilities Contracts (Amendment) Regulations
288
2001 (SI 2001/2418)) and of the European Communities (including Directive 93/98 as amended by Directive 98/4) affecting the water and sewerage sector and including any jurisprudence of the courts of the United Kingdom and of the European Communities and decisions of the European Commission in respect of such rules. “Qualifying Class A Debt” means the aggregate Outstanding Principal Amount of Class A Debt entitled to be voted by the Class A DIG Representatives. “Qualifying Class A Debt Provider” means a provider of Qualifying Class A Debt. “Qualifying Class B Debt” means the aggregate Outstanding Principal Amount of Class B Debt entitled to be voted by the Class B DIG Representatives. “Qualifying Class B Debt Provider” means a provider of Qualifying Class B Debt. “Qualifying Debt” means the Qualifying Class A Debt, the Qualifying Class B Debt, the Senior Mezzanine Debt or Junior Mezzanine Debt, as the context requires. “Rating Agencies” means Fitch, Moody’s and S&P and any further or replacement rating agency appointed by the Issuer with the approval of the Security Trustee (acting upon the instructions of the Majority Creditors) to provide a credit rating or ratings for the Class A Debt and the Class B Debt and shadow ratings in respect of Class A Wrapped Debt and Class B Wrapped Debt for so long as they are willing and able to provide credit ratings generally (and “Rating Agency” means any one of them). “Rating Requirement” means confirmation from any two Rating Agencies or, where expressly stated, all Rating Agencies then rating the Bonds that, in respect of any matter where such confirmation is required, the shadow rating is, in the case of the Class A Wrapped Debt, A- by Fitch and S&P and A3 by Moody’s or above and in the case of the Class A Unwrapped Debt, is A- by Fitch and S&P and A3 by Moody’s or above. “RBS” means The Royal Bank of Scotland plc. “RBSG” means The Royal Bank of Scotland Group plc, a company incorporated in Scotland and ultimate holding company of the RBS Group. “RBS Group” means RBSG and its Subsidiaries. “RCV” means, in relation to any date, the regulatory capital value for such date as last determined (excluding any draft determination of the regulatory capital value by the Director General) and notified to SWS by the Director General at the most recent Periodic Review or IDOK or other procedure through which in future the Director General may make such determination on an equally definitive basis to that of a Periodic Review or IDOK (interpolated as necessary and adjusted as appropriate for Out-turn Inflation), provided that “RCV” for the purposes of calculating the Senior RAR and Class A RAR for any Test Period for which there is no Final Determination shall be SWS’ good faith, honestly held present estimate of its regulatory capital value on the last day of
289
such Test Period. “Receipt” means a receipt attached on issue to a Definitive Bond redeemable in instalments for the payment of an instalment of principal and includes any replacements for Receipts and Talons issued pursuant to Condition 14 (Replacement of Bonds, Coupons, Receipts and Talons). “Receiptholders” means the several persons who are for the time being holders of the Receipts. “Register” means a register of the Bondholders of a Sub-Class of Registered Bonds. “Registered Bonds” means those of the Bonds which are for the time being in registered form. “Registered Office Agreement” means the registered office agreement dated 1 January 2002 between the Issuer, Maples and Calder and M&C Corporate Services Limited (now known as Maples Corporate Services Limited). “Registrar” means Deutsche Bank Luxembourg S.A. as a registrar under the Agency Agreement and any other entity appointed as a registrar under the Agency Agreement. “Regulated Company” means a company appointed as a water undertaker or a water and sewerage undertaker under section 6 of the WIA. “Regulation S” has the meaning given to such term under the Securities Act. “Relevant Authorisation” means all consents, licences, authorisations and approvals (including any such as may be required pursuant to the Instrument of Appointment): (a) necessary to enable the consummation of the transactions constituted by the Finance Documents to which SWS is a party; (b) (including the Instrument of Appointment) necessary for the conduct of the business of SWS substantially as conducted at the date hereof and for the leasing of the Equipment; and (c) any other consent, licence or authorisation required in accordance with the normal course of business or good industry practice, and in each case, which if not obtained or complied with or which if revoked or terminated would have a Material Adverse Effect. “Relevant Date” has the meaning set out in Condition 6(i) (Definitions). “Remedial Plan” means any remedial plan agreed by SWS and the Security Trustee under Part 2 of Schedule 6 (Trigger Events) of the CTA. “Rental” means any scheduled payment of rental, periodic charge or equivalent sum under a Finance Lease. “Rental Payment Date” means any date on which Rental is scheduled to be paid under any Finance Lease. “Rental Period” means, in respect of a Finance Lease, each period falling between
290
two Rental Payment Dates under the Finance Lease. “Repeated Representations” means: (a) the representations set out in Paragraphs 1 to 3, 8 to 10, 12 to 14 and 17 to 19 (inclusive) of Schedule 3 (General Representations) of the CTA; (b) the representations set out in Paragraphs 1 and 5 of Schedule 4 (SWS representations) of the CTA; And which are deemed, pursuant to the CTA to be repeated on: – the date of each Request and the first day of any borrowing; – each Payment Date; – in relation to any new Material Agreement, the day on which such agreement is entered into and only in relation to such new Material Agreement; and – each date on which a Restricted Payment is made. See Chapter 7 “Summary of the Financing Agreements” under “Common Terms Agreement — Representations”. “Request” means a request for utilisation of any Authorised Credit Facility. “Required Balance” means the sum of the Class A Required Balance and the Class B Required Balance. “Reserved Matters” means matters which, subject to the Intercreditor Arrangements, a Secured Creditor is free to exercise in accordance with its own facility arrangements and not by the direction of the Majority Creditors as more particularly described in the STID. “Restricted Chargors” means each of the Issuer and SWS and any other entity which accedes to the Security Agreement pursuant to Clause 27.3 (Assignments and transfers) thereof that is restricted from providing guarantees by its regulatory or statutory obligations. “Restricted Payment” means any Distribution, Customer Rebate, or payment under the Subordinated Debt or the SWS Preference Shares other than: (a) to the extent required to make any payment under an Authorised Credit Facility in accordance with the provisions of the CTA and the STID, a payment by SWS under any Issuer/SWS Loan Agreement; (b) a payment made under a Permitted Tax Loss Transaction; (c) any Permitted Post-Closing Event; (d) a Subordinated Debt Replacement Event or SWS Preference Share Conversion Event; or (e) an SWS/SWSG Debt Service Distribution. “Restricted Payment Condition” means each of the conditions which must be satisfied or waived by the Security Trustee before a Restricted Payment may be made by the Issuer or SWS. “Restricted Secured Liabilities” means all present and future obligations and liabilities (whether actual or contingent and whether owed jointly or severally or in any other capacity whatsoever) of each Restricted Chargor to any
291
Secured Creditor under each Finance Document to which such Restricted Chargor is a party, except for any obligation which, if it were secured under the Security Agreement, would result in a contravention of Section 151 of the Companies Act 1985. “Retail Price Index” or “RPI” means the all items retail prices index for the United Kingdom Published by the Office for National Statistics or at any future date such other index of retail prices as may have then replaced it for the purposes of the Director General’s determination of price limits for water and sewerage services. “Rights” means all rights vested in the Security Trustee by virtue of, or pursuant to, its holding the interests conferred on it by the Security Documents or under the Ancillary Documents and all rights to make demands, bring proceedings or take any other action in respect of such rights. “Rolling Average Period” means on each Calculation Date the Test Period ending on 31 March that falls in the same calendar year as that Calculation Date and the next subsequent two consecutive Test Periods. “S&P” means Standard & Poor’s Ratings Services, a Division of The McGraw Hill Companies Inc., or any successor to the rating agency business of S&P. “Scheduled Debt Service” means the amounts referred to in sub-paragraphs (i)-(xii) of the Payment Priorities (other than principal repayments on the Class A Debt and Class B Debt) payable on a particular Payment Date. “Second Artesian Term Facility” means the £155,484,023.05 index-linked term facility made available to the Issuer by Artesian. “Second Artesian Term Facility means a facility agreement dated 5 July 2004 under which the Agreement” Second Artesian Term Facility was made available to the Issuer and includes that facility agreement in the form amended and restated at the time of the novation of such facility agreement to Artesian. “Second Issue Date” means 5 July 2004. “Second Issuer/SWS Loan means the loan agreement entered into between the Issuer and Agreement” SWS on 5 July 2004. “Second RCF Providers” means the Finance Parties party to the Second Revolving Credit Facility. “Second Revolving Credit Facility” means the revolving credit facility of an aggregate facility amount of £120,000,000 made available to SWS by RBS and Bayerische Landesbank, London Branch on 30 June 2005. “Second Revolving Credit Facility means the agreement in respect of the Second Revolving Credit Agreement” Facility. “Secretary of State” means one of Her Majesty’s principal secretaries of state. “Section 19 Undertaking” means an undertaking given by a Regulated Company to secure or facilitate compliance with a licence condition or a relevant statutory or other requirement and which is capable of direct enforcement under the WIA.
292
“Secured Creditor” means the Security Trustee (in its own capacity and on behalf of the other Secured Creditors), the Bond Trustee (in its own capacity and on behalf of the Bondholders), the Bondholders, each Financial Guarantor, the Hedge Counterparties, the Issuer, the Liquidity Facility Agents, each Liquidity Facility Provider, the Initial Authorised Credit Facility Arranger, the Initial Authorised Credit Facility Agent, the Initial Authorised Credit Provider, Artesian II, Artesian and each other Authorised Credit Provider, the Standstill Cash Manager, each Agent, the Mezzanine Finance Parties, and any Additional Secured Creditors. “Secured Creditor Representative” means: (a) in respect of the Bondholders, the Bond Trustee (b) in respect of the Initial RCF Providers, the Initial RCF Agent; (c) in respect of Artesian II, Artesian II; (d) in respect of Artesian, Artesian; (e) in respect of the Issuer/SWS Loan Agreements, the Security Trustee (on behalf of the Issuer); (f) in respect of any Liquidity Facility Provider, the facility agent under the relevant Liquidity Facility Agreement; (g) in respect of the Senior Mezzanine Finance Parties, the Senior Mezzanine Facility Agent; (h) in respect of the Junior Mezzanine Finance Parties, the Junior Mezzanine Facility Agent; and (i) in respect of any Additional Secured Creditor, the representative of such Additional Secured Creditor (if any) appointed as its Secured Creditor Representative under the terms of the relevant Finance Document and named as such in the relevant Accession Memorandum. “Secured Liabilities” means the Restricted Secured Liabilities and the Unrestricted Secured Liabilities. “Securities Act” means the United States Securities Act of 1933, as amended. “Security” means the security constituted by the Security Documents, including any Guarantee or obligation to provide cash collateral or further assurance thereunder. “Security Agreement” means the deed of charge and guarantee executed in favour of the Security Trustee by each of the Obligors on the Initial Issue Date. “Security Assets” means all property, assets, rights and undertakings the subject of the Security created by the Obligors pursuant to any Security Document, together with the Rights. “Security Documents” means: (a) the Security Agreement; (b) the STID and each deed of accession thereto; and
293
(c) any other document evidencing or creating security over any asset of an Obligor to secure any obligation of any Obligor to a Secured Creditor under the Finance Documents. “Security Interest” means: (a) any mortgage, pledge, lien, charge, assignment or hypothecation, or other encumbrance securing any obligation of any person; (b) any arrangement under which money or claims to money, or the benefit of, a bank or other account may be applied, set off or made subject to a combination of accounts so as to effect discharge of any sum owed or payable to any person; or (c) any other type of preferential arrangement (including any title transfer and retention arrangement) having a similar effect. “Security Trustee” means Deutsche Trustee Company Limited or any successor appointed pursuant to the STID. “Senior Adjusted ICR” means, in respect of a Test Period, the ratio of Net Cash Flow less the aggregate of CCD and IRC during such Test Period to Senior Debt Interest during such Test Period. “Senior Average Adjusted ICR” means the sum of the ratios of Net Cash Flow less the aggregate of CCD and IRC to Senior Debt Interest for each of the Test Periods comprised in a Rolling Average Period divided by three. “Senior Debt” means all Class A Debt and Class B Debt and any other debt ranking in priority to subordinated debt of any member of the SWS Financing Group. “Senior Debt Interest” means, in relation to any Test Period and without double counting, an amount equal to the aggregate of: (a) all interest paid, due but unpaid or, in respect of forward- looking ratios, payable, on the Issuer’s and/or SWS’ obligations under and in connection with all Class A Debt and Class B Debt; (b) all interest paid, due but unpaid or, in respect of forward- looking ratios, payable under or in connection with any Permitted Financial Indebtedness falling within paragraph (e) of that definition; (c) all fees paid, due but unpaid or, in respect of forward- looking ratios, payable, to any Financial Guarantor; and (d) Adjusted Lease Reserve Amounts or Lease Reserve Amounts paid, due but unpaid or, in respect of forward- looking ratios, payable, on the Issuer’s and/or SWS’ obligations under and in connection with all Class A Debt and Class B Debt,
294
in each case during such Test Period (after taking account of the impact on interest rates of all related Hedging Agreements then in force) (excluding all indexation of principal to the extent it has been included in such interest or other amounts, amortisation of the costs of issue of any Class A Debt and Class B Debt within such Test Period and all other costs incurred in connection with the raising of such Class A Debt or Class B Debt) less all interest received or, in respect of forward-looking ratios, receivable by any member of the SWS Financing Group from a third party during such Test Period (excluding any interest received or receivable from SWSG under the SWS/SWSG Loan Agreement). “Senior Mezzanine Debt” means the principal amount outstanding for the time being under the loan made by the Senior Mezzanine Facility Providers under the Senior Mezzanine Facility Agreement. “Senior Mezzanine Facility” means a credit facility in the amount of £127,200,000 provided by the Senior Mezzanine Facility Providers to the Issuer pursuant to the Senior Mezzanine Facility Agreement. “Senior Mezzanine Facility Agent” means The Royal Bank of Scotland plc or any successor thereto as agent under the Senior Mezzanine Facility Agreement. “Senior Mezzanine Facility means the £127,200,000 senior mezzanine facility agreement Agreement” dated the Initial Issue Date between the Issuer, the Senior Mezzanine Facility Agent, the Senior Mezzanine Facility Arranger, the Original Senior Mezzanine Facility Provider and the Security Trustee. “Senior Mezzanine Facility Arranger” means RBEF Limited. “Senior Mezzanine Facility means the “Lenders” (as defined in the Senior Mezzanine Facility Providers” Agreement). “Senior Mezzanine Finance Parties” means: (a) the Senior Mezzanine Facility Agent; (b) the Senior Mezzanine Facility Arranger; and (c) the Senior Mezzanine Facility Providers. “Senior Net Indebtedness” means, as at any date, all the Issuer’s and SWS’ nominal debt outstanding (or, in respect of a future date, forecast to be outstanding) under and in connection with any Class A Debt and Class B Debt on such date and the nominal amount of any Financial Indebtedness falling within paragraph (e) of the definition of Permitted Financial Indebtedness which is outstanding (or, in respect of a future date, forecast to be outstanding) on such date including, in each case, all indexation accrued but unpaid up to and including such date (after taking account of the impact on interest rates of all related Hedging Agreements then in force) on any such liabilities which are indexed together with any interest due and unpaid (after taking account of the impact on interest rates of all related Hedging Agreements then in force) and less the value of all Authorised Investments and all other amounts standing to the credit of any Account (other than an amount equal to the Excluded Insurance
295
Proceeds Amount an amount equal to the aggregate of any amounts which represent Customer Rebates or Distributions which have been declared but not paid on such date) (where such debt is denominated other than in pounds sterling, the nominal amount outstanding will be calculated (i) in respect of debt with associated Currency Hedging Agreements, by reference to applicable hedge rates; or (ii) in respect of debt with no associated Currency Hedging Agreements, by reference to the Exchange Rate on such date). “Senior RAR” means, on any Calculation Date, the ratio of Senior Net Indebtedness to RCV as at such Calculation Date or, in the case of forward-looking ratios in respect of Test Periods ending after such Calculation Date, as at the 31 March falling in such Test Period. “Series” means a series of Bonds issued under the Programme on a particular Issue Date, together with any Tranche or Tranches of Bonds which are expressed to be consolidated and form a single Sub-Class with any Sub-Class issued on such Issue Date. “Series 1 Bonds” means the Issuer’s Series 1 Bonds issued on the Initial Issue Date, as further defined in Chapter 3 “Summary Financing Structure”. “Series 1 Redeemed Bonds” has the meaning given to that term on page 26 of this Prospectus. “Series 2 Bonds” means the Issuer’s Series 2 Bonds issued on the Third Issue Date, as further defined in Chapter 3 “Summary Financing Structure”. “Series 3 Bonds” means the Issuer’s Series 3 Bonds issued on the Fourth Issue Date, as further defined in Chapter 3 “Summary Financing Structure”. “Series 4 Bonds” means the Issuer’s Series 4 Bonds issued on the Fifth Issue Date, as further defined in Chapter 3 “Summary Financing Structure”. “Shareholder Tax Deed of Covenant” means the deed of covenant entered into on the Initial Issue Date by, among others, the Security Trustee, RBSG and MBIA Assurance S.A. “Share Pledges” means the pledges dated on or about the Initial Issue Date, in favour of the Security Trustee, over the shares in SWSH, SWS and the Issuer respectively and “Share Pledge” means any one of them. “Shipwreck Clause” means a clause which may be contained in the licence of a Regulated Company and which is contained in the Licence of SWS at Part IV of Condition B, pursuant to which the Regulated Company may, if so permitted by the conditions of its licence, request price limits to be reset if the Appointed Business either (i) suffers a substantial adverse effect which could not have been avoided by prudent management action or (ii) enjoys a substantial favourable effect which is fortuitous and not attributable to prudent management action. “Shortfall Paragraph” means to the extent that (after payment of all relevant operating expenditure) there is a shortfall of forecast revenues, the relevant sub-paragraph of the Payment Priorities in relation to which the revenue that is forecast to be available is insufficient to meet all of the payments in such sub-paragraph.
296
“Special Administration” means the insolvency process specific to Regulated Companies under Sections 23 to 26 of the WIA. “Special Administration Order” means an order of the High Court under sections 23 to 25 of the WIA under the insolvency process specific to Regulated Companies. “Special Administration Petition means the period beginning with the presentation of the petition Period” for Special Administration under Section 24 of the WIA and ending with the making of a Special Administration Order or the dismissal of the petition. “Special Administrator” means the person appointed by the High Court under Sections 23 to 25 of the WIA to manage the affairs, business and property of the Regulated Company during the period in which the Special Administration Order is in force. “Standard & Poor’s” or “S&P” means Standard & Poor’s Ratings Services, a division of the McGraw-Hill Companies Inc. or any successor to the rating business of Standard & Poor’s Rating Services. “Standby Drawing” means a drawing made under a Liquidity Facility Agreement as a result of a downgrade of a Liquidity Facility Provider below the Required Ratings or in the event that the Liquidity Facility Provider fails to renew its commitment on the expiry of the term of such Liquidity Facility Agreement. “Standstill” means, as provided for in Clause 13.1 (Commencement of Standstill) of the STID, a standstill of claims of the Secured Creditors against SWS and the Issuer immediately upon notification to the Security Trustee of the occurrence of an Event of Default. See Chapter 7 “Summary of the Financing Agreements” under “Security Trust and Intercreditor Deed - Standstill” for a summary. “Standstill Cash Manager” means The Royal Bank of Scotland plc in its capacity as Standstill Cash Manager under the CTA, or any successor Standstill Cash Manager. “Standstill Event” means an event giving rise to a Standstill in accordance with the STID. See Chapter 7 “Summary of the Financing Agreements” under “Security Trust and Intercreditor Deed - Standstill” for a summary. “Standstill Extension” means any of the periods for which a Standstill Period is extended under Clause 13.5 (Extension of Standstill) of the STID, See Chapter 7 “Summary of the Financing Agreements” under “Security Trust and Intercreditor Deed – Standstill Extension” for a summary. “Standstill Period” means a period during which a standstill arrangement is subsisting, commencing on the date as determined by Clause 13.1 (Commencement of Standstill) of the STID and ending on the date as determined by Clause 13.4 (Termination of Standstill) of the STID. See Chapter 7 “Summary of the Financing Agreements” under “Security Trust and Intercreditor Deed - Standstill” for a summary.
297
“Statutory Accounts” means the statutory accounts which SWS is required to prepare in compliance with the Companies Act 1985, as amended from time to time. “STID” means the security trust and intercreditor deed entered into on the Initial Issue Date between, among others, the Security Trustee, the Obligors, the Bond Trustee and MBIA Assurance S.A., together with any deed supplemental to the STID and referred to in the STID as a “Supplemental Deed”. “STID Directions Request” means a written notice of each STID Proposal sent by the Security Trustee to the Secured Creditors or their Secured Creditor Representatives and requesting directions from the relevant Secured Creditors in accordance with the STID. “STID Proposal” means a proposal or request made by any Secured Creditor or its Secured Creditor Representative or any Obligor in accordance with the STID proposing or requesting the Security Trustee: to execute a supplemental deed to the STID; to change, modify or waive any term or condition of any Finance Document; to substitute the Issuer; or to take any Enforcement Action or any other action in respect of the transactions contemplated by the Finance Documents; as defined more particularly in the STID. “Stock Exchange” means the London Stock Exchange or any other or further stock exchange(s) on which any Bonds may from time to time be listed, and references in these presents (as defined in this Prospectus) to the “relevant Stock Exchange” shall, in relation to any Bonds, be references to the Stock Exchange on which such Bonds are, from time to time, or are intended to be, listed. “Sub-Class” is a division of a Class. “Subordinated Authorised Loan means, in relation to any Authorised Credit Facility, the aggregate Amounts” of any amounts payable by the Issuer or SWS to the relevant Authorised Credit Provider on an accelerated basis as a result of illegality (excluding accrued interest, principal and recurring fees and commissions) on the part of the Authorised Credit Provider or any other amounts not referred to in any other paragraph of the Payment Priorities. “Subordinated Coupon Amounts” means, in the case of Fixed Rate Bonds or Indexed Bonds, any amounts (other than deferred interest) by which the Coupon on such Bonds exceeds the initial Coupon as at the date on which such Bonds were issued and, in the case of Floating Rate Bonds, any amounts (other than deferred interest) by which the margin on the Coupon on such Bonds exceeds the initial margin on the Coupon on such Bonds as at the date on which such Bonds were issued. “Subordinated Debt” means any Financial Indebtedness (other than Financial Indebtedness falling within paragraph (e) of the definition of Permitted Financial Indebtedness) that is fully subordinated, in a manner satisfactory to the Security Trustee and each Financial Guarantor, to the Class A Debt and Class B Debt and where the
298
relevant credit provider has acceded to the Common Terms Agreement and the STID or upon an SWS Preference Share Conversion Event, the SWS Preference Share Deed, including, for the avoidance of doubt, the Mezzanine Debt. “Subordinated Debt Replacement means any refinancing of any or all of the Senior Mezzanine Debt Event” or Junior Mezzanine Debt at any time so long as (i) no Event of Default is continuing or would result from such refinancing; (ii) no Trigger Event described in Chapter 7 “Summary of the Financing Agreements” under “Common Terms Agreement: Trigger Events – Financial Ratios”; “Common Terms Agreement: Trigger Events – Liquidity for Capital Expenditure and Working Capital”; “Common Terms Agreement: Trigger Events – Debt Service Required Payment Shortfall” and “Common Terms Agreement: Trigger Events – Drawdown on DSR Liquidity Facilities and O&M Reserve Facility” is continuing; and (iii) the Financial Indebtedness incurred in order to raise funds for such refinancing (which may, for the avoidance of doubt, be by way of subordinated bonds) ranks below the Class B Debt and is on substantially the same terms as the Senior Mezzanine Debt or the Junior Mezzanine Debt, as the case may be, being refinanced. “Subordinated Liquidity Facility means, in relation to any Liquidity Facility: Amounts” (a) the amount by which the amount of interest accruing at the Mandatory Cost Rate at any time exceeds the Mandatory Cost Rate on the date of the relevant Liquidity Facility Agreement; and (b) the aggregate of any amounts payable by the Issuer to the relevant Liquidity Facility Provider in respect of its obligation to gross-up any payments made by it in respect of such Liquidity Facility as a result of such Liquidity Facility Provider ceasing to be a Liquidity Facility Provider or to make any payment of increased costs to such Liquidity Facility Provider (other than any such increased costs in respect of regulatory changes relating to capital adequacy requirements applicable to such Liquidity Facility Provider) or to amounts payable on an accelerated basis as a result of illegality (excluding accrued interest, principal and commitment fees) on the part of such Liquidity Facility Provider, or any other amounts not referred to in any other paragraph of the Payment Priorities. “Subscription Agreement” means an agreement supplemental to the Dealership Agreement (by whatever name called) substantially in the form set out in Schedule 6 to the Dealership Agreement or in such other form as may be agreed between, among others, the Issuer and the Lead Manager or one or more Dealers (as the case may be). “Subsidiary” means: (a) a subsidiary within the meaning of section 736 of the Companies Act; and
299
(b) unless the context otherwise requires, a subsidiary undertaking within the meaning of section 258 of the Companies Act. “Successor” means, in relation to the Principal Paying Agent, the other Paying Agents, the Registrar, the Transfer Agent, the Agent Bank and the Calculation Agent, any successor to any one or more of them in relation to the Bonds which shall become such pursuant to the provisions of the Bond Trust Deed and/or the Agency Agreement (as the case may be) and/or such other or further principal paying agent, paying agents, registrar, transfer agents, agent bank and calculation agent (as the case may be) in relation to the Bonds as may (with the prior approval of, and on terms previously approved by, the Bond Trustee in writing) from time to time be appointed as such, and/or, if applicable, such other or further specified offices (in the case of the Principal Paying Agent being within the same city as the office(s) for which it is substituted) as may from time to time be nominated, in each case by the Issuer and the Obligors, and (except in the case of the initial appointments and specified offices made under and specified in the Conditions and/or the Agency Agreement, as the case may be) notice of whose appointment or, as the case may be, nomination has been given to the Bondholders. “Super-Majority Creditor” means the Class A DIG Representatives in respect of more than 66 per cent. of the Voted Qualifying Class A Debt or, following the repayment in full of the Class A Debt, the Class B DIG Representatives in respect of more than 66 per cent. of the Voted Qualifying Class B Debt, in each case subject to Clause 8 (Modifications, Consents and Waivers) and Clause 9 (Voting, Instructions and Notification of Outstanding Principal Amounts of Qualifying Debt) of the STID as summarised in Chapter 7 “Summary of the Financing Agreements” under “Security Trust and Intercreditor Deed – Super-Majority Creditor Decisions”. “Supplemental Deed” means a deed supplemental to the STID entered into by the Security Trustee on its own behalf and on behalf of the Secured Creditors in the circumstances referred to in Clause 2.1 (Accession of Additional Secured Creditor) or Clause 3 (Additional Finance Documents) of the STID. “Surveillance Letter” means a letter issued by the Issuer and/or SWS to a Financial Guarantor from time to time, in which the Issuer and/or SWS undertakes to provide the relevant Financial Guarantor with certain information and to comply with certain reporting requirements as outlined in that letter. “SWC” means Southern Water Capital Limited. “SWEPST” means Southern Water Executive Pension Scheme Trustees Limited. “SWI” means Southern Water Investments Limited. “SWPS” means the Southern Water Pension Scheme for SWS employees.
300
“SWPT” means Southern Water Pension Trustees Limited. “SWS” or “Southern Water” means Southern Water Services Limited. “SWS Business Financial Model” means the business Financial model prepared by SWS and delivered to the Security Trustee from time to time. “SWS Change of Control” means the occurrence of any of the following events or circumstances: (a) SWSGH ceasing to hold legally and beneficially all rights in 100 per cent. of the issued share capital of, or otherwise ceasing to control, SWSH; (b) SWSH ceasing to hold legally and beneficially all rights in 100 per cent. of the issued ordinary share capital of, or otherwise ceasing to control, SWS; or (c) SWS ceasing to hold legally and beneficially all rights in 100 per cent. of the issued share capital of, or otherwise ceasing to control, the Issuer and the SWS Pension Companies. “SWS Event of Default” means the events of default set out in Part 2 (Events of Default (SWS)) of Schedule 7 (Events of Default) of the CTA. “SWS Financing Group” means SWSGH, SWSH, SWS, the Issuer and any other Permitted Subsidiaries. “SWS Pension Schemes” means the Southern Water Pension Scheme and the Southern Water Executive Pension Scheme. “SWS Preference Share Conversion means an exercise of a Conversion Option as defined in SWS’ Event” articles of association. “SWS Preference Share Deed” means the deed entered into by among others, the initial holders of the SWS Preference Shares and the Security Trustee. “SWS Preference Shareholders” means the holders of the SWS Preference Shares from time to time. “SWS Preference Shares” means the Class A1 Preference Shares, the Class A2 Preference Shares and the Class B Preference Shares. “SWS VAT Group” means the VAT group registration comprising SWI, SWS and SWC of which SWS is the representative member. “SWS Water Resources Strategy” means the water resources strategy that SWS has developed for the next 25 years, which was audited by an Ofwat reporter and submitted for approval to Ofwat and the EA. “SWSG” means Southern Water Services Group Limited, a company incorporated under the laws of England and Wales (registered number 0437 4956). and the holding company of the SWS Financing Group. “SWSGH” means SWS Group Holdings Limited. “SWSH” means SWS Holdings Limited. “SWS/SWSG Debt Service means any Distribution or payment in respect of a Permitted Tax Distribution” Loss Transaction to be made by SWS for the purpose of providing SWSG with the funds required to enable SWSG to meet its
301
scheduled payment obligations under the SWS/SWSG Loan Agreement. “SWS/SWSG Loan” means the principal amount outstanding under the SWS/SWSG Loan Agreement from time to time. “SWS/SWSG Loan Agreement” means the loan agreement entered into between the Security Trustee, SWS and SWSG on the Initial Issue Date evidencing the terms of the SWS/SWSG Loan. “SW Tax Deed of Covenant” means the deed of covenant entered into on the Initial Issue Date (as amended from time to time) by, among others, the Security Trustee, SWI, MBIA Assurance S.A. and the Obligors. “Talons” means the talons (if any) appertaining to, and exchangeable in accordance with the provisions therein contained for further Coupons appertaining to, the Definitive Bonds (other than Zero Coupon Bonds) and includes any replacements for Talons issued pursuant to Condition 14 (Replacement of Bonds. Coupons, Receipts and Talons). “Talonholders” means the several persons who are for the time being holders of the Talons. “TARGET Settlement Day” has the meaning given to such term in Condition 6(i) (Definitions) as set out in Chapter 8 “The Bonds”. “Tax” means any tax, levy, impost, duty or other charge or withholding of a similar nature (including any related penalty or interest) and “Taxes”, “taxation”, “taxable” and comparable expressions will be construed accordingly. “Tax Deeds of Covenant” means the Shareholder Tax Deed of Covenant and the SW Tax Deed of Covenant. “TDC Breach” means any breach of any covenant or representation given by, or other obligation imposed upon, any person in either of the Tax Deeds of Covenant which is considered to constitute a TDC Breach, in accordance with the terms of the relevant Tax Deed of Covenant (which, among other things, prevents a breach being a TDC Breach unless it causes, or could reasonably be expected to cause, a Material Adverse Effect). “Temporary Global Bond” means in relation to any Sub-Class of Bearer Bonds a temporary global bond in the form or substantially in the form set out in Schedule 2, Part A to the Bond Trust Deed together with the copy of the applicable Final Terms annexed thereto, with such modifications (if any) as may be agreed between the Issuer, the Principal Paying Agent, the Bond Trustee and the relevant Dealer(s), comprising some or all of the Bearer Bonds of the same Tranche, issued by the Issuer pursuant to the Dealership Agreement or any other agreement between the Issuer and the relevant Dealer(s) relating to the Programme, the Agency Agreement and the Bond Trust Deed.
302
“Test Period” means: (a) the period of 12 months ending on 31 March in the then current year; (b) the period of 12 months starting on 1 April in the same year; (c) each subsequent 12 month period up to the Date Prior; and (d) if the Calculation Date falls within the 13 month period immediately prior to the Date Prior, the 12 month period from the Date Prior” “Third Issue Date” means 27 May 2005. “Third Issuer/SWS Loan Agreement” means the loan agreement entered into between the Issuer and SWS on 27 May 2005. “Tranche” means all Bonds which are identical in all respects (save for the Issue Date, Interest Commencement Date and Issue Price). “Transaction Documents” means: (a) a Finance Document; (b) a Material Capex Agreement or a Material O&M Agreement; and (c) any other document designated as such by the Security Trustee and the Issuer. “Transfer Agent” means Deutsche Bank AG London under the Agency Agreement, including any Successor thereto. “Transfer Scheme” means a transfer scheme under Schedule 2 of the WIA. “Treasury Transaction” means any currency or interest rate purchase, cap or collar agreement, forward rate agreement, interest rate agreement, interest rate or currency or future or opinion contract, foreign exchange or currency purchase or sale agreement, interest rate swap, currency swap or combined similar agreement or any derivative transaction protecting against or benefiting from fluctuations in any rate or price. “Trigger Credit Rating” means each credit rating identified as such in Chapter 7 “Summary of the Financing Agreements” under “Trigger Events”. “Trigger Event” means any of the events or circumstances identified as such in Chapter 7 “Summary of the Financing Agreements” under “Trigger Events”. “Trigger Event Consequences” means any of the consequences of a Trigger Event identified as such in Chapter 7 “Summary of the Financing Agreements” under “Trigger Event Consequences”. “Trigger Event Ratio Levels” means the financial ratios set out in Chapter 7 “Summary of the Financing Agreements” under “Trigger Events: Financial Ratios”. “Trigger Event Remedies” means any remedy to a Trigger Event as identified in Chapter 7 “Summary of the Financing Agreements” under “Trigger Event Remedies”. “UK” means the United Kingdom.
303
“UK Listing Authority” or “UKLA” means the Financial Services Authority in its capacity as competent authority under the FSMA. “Unrestricted Chargor” means each of SWSH and SWSGH and any other entity which accedes to the Security Agreement pursuant to Clause 27.3 (Assignments and Transfers) thereof that is not restricted by its regulatory or statutory obligations from providing guarantees to any other entity. “Unrestricted Secured Liabilities” means all present and future obligations and liabilities (whether actual or contingent and whether owed jointly or severally or in any other capacity whatsoever) of each Unrestricted Chargor to any Secured Creditor under each Finance Document to which such Unrestricted Chargor is a party, except for any obligation which, if it were secured under the Security Agreement, would result in a contravention of Section 151 of the Companies Act 1985. “Unwrapped Debt” or “Unwrapped means any indebtedness or bond (respectively) that does not have Bond” the benefit of a guarantee from a Financial Guarantor. “Unwrapped Bondholders” means the holders for the time being of the Unwrapped Bonds and “Unwrapped Bondholder” shall be construed accordingly. “UWWTD” means the Urban Waste Water Treatment Directive (91/271/EEC). “VAT” (a) in respect of any Finance Lease Document, has the meaning given thereto in such Finance Lease Document; and (b) otherwise, means value added tax as imposed by the Value Added Tax Act 1994 and legislation supplemental thereto and other tax of a similar fiscal nature whether imposed in the United Kingdom (instead of, or in addition to, VAT) or elsewhere. “Voted Qualifying Class A Debt” means the aggregate Outstanding Principal Amount of Class A Debt voted by the Class A DIG Representatives in accordance with the applicable provisions of the STID as part of the Class A DIG. “Voted Qualifying Class B Debt” means the aggregate Outstanding Principal Amount of Class B Debt voted by the Class B DIG Representatives in accordance with the applicable provisions of the STID as part of the Class B DIG. “Water Act” means the United Kingdom Water Act 2003. “Water Quality Regulations” means the Water Supply (Water Quality) Regulations 2000, as amended by subsequent legislation. “WIA” means the United Kingdom Water Industry Act 1991 (as amended by subsequent legislation, including the Competition and Service (Utilities) Act 1992 and the WIA 99). “WIA 99” means the United Kingdom Water Industry Act 1999. “WRA” means the United Kingdom Water Resources Act 1991, as amended by subsequent legislation including the United Kingdom Environment Act 1995. “Wrapped Debt” or “Wrapped Bond” means any indebtedness or bond (respectively) that has the benefit
304
of a guarantee from a Financial Guarantor. “Wrapped Bondholders” means the holders for the time being of the Wrapped Bonds and “Wrapped Bondholder” shall be construed accordingly. “WRMP” means the draft water resources management plan submitted by SWS to Ofwat in May 2009, and the final draft water resources management plan to be submitted in December 2009. “WSRA” means the Water Services Regulation Authority. “Zero Coupon Bond” means a Bond specified as such in the relevant Final Terms and on which no interest is payable.
305
REGISTERED OFFICE OF THE ISSUER
PO Box 309, Ugland House Grand Cayman KYI-1104 Cayman Islands
REGISTERED OFFICE OF SWS, SWSH and SWSGH
Southern House Yeoman Road Worthing West Sussex BN13 3NX
BOND TRUSTEE AND SECURITY TRUSTEE
Deutsche Trustee Company Limited Winchester House 1 Great Winchester Street London EC2N 2DB
PRINCIPAL PAYING AGENT, TRANSFER REGISTRAR AGENT AND AGENT BANK
Deutsche Bank AG, London Branch Deutsche Bank Luxembourg Winchester House Deutsche Bank Luxembourg S.A. 1 Great Winchester Street 2 boulevard Konrad Adenauer London EC2N 2DB L-1115 Luxembourg
LEGAL ADVISERS
To the Issuer, SWS, SWSH and SWSGH as to English law
Linklaters LLP One Silk Street London EC2Y 8HQ
To the Co-Arrangers, the Dealers, the Bond Trustee and the Security Trustee as to English law
Clifford Chance LLP 10 Upper Bank Street London E14 5JJ
To the Issuer as to Cayman Islands law
Maples and Calder 7 Princes Street London EC2M 8AQ
AUDITORS
To the Issuer, SWS, SWSH and SWSGH
PricewaterhouseCoopers LLP 1 Embankment Place London WC2N 6RH
306
DEALERS
Citigroup Global Markets Limited HSBC Bank plc The Royal Bank of Scotland plc Citigroup Centre 8 Canada Square 135 Bishopsgate Canada Square London E14 5HQ London EC2M 3UR Canary Wharf London E14 5LB
307